EconTalktag:,2008-09-28:/22017-10-16T14:28:20ZMovable Type Pro 4.21-enMegan McArdle on Internet Shaming and Online Mobstag:www.econtalk.org,2017://2.153742017-10-16T10:30:00Z2017-10-16T14:28:20Z Author and journalist Megan McArdle of Bloomberg View talks with EconTalk host Russ Roberts about how the internet has allowed a new kind of shaming via social media and how episodes of bad behavior live on because Google's memory...Russell Robertshttp://www.econtalk.org
Author and journalist Megan McArdle of Bloomberg View talks with EconTalk host Russ Roberts about how the internet has allowed a new kind of shaming via social media and how episodes of bad behavior live on because Google's memory is very, very good. McArdle discusses the implications this new reality has on how we behave at work and how people protect and maintain their reputations in a world where nothing is forgotten and seemingly little is forgiven.

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0:33

Intro. [Recording date: September 11, 2017.]

Russ Roberts: Today we're going to be discussing Internet shaming--the power of groups and related topics, based on a piece that Megan McArdle wrote for Bloomberg View that we'll put a link up to.... As you point out at the beginning of your piece, people have always said and done embarrassing things that live on. And hurt their reputation. The Internet seems to make a difference, though. How?

Megan McArdle: Well, it's the scale. Right? You see this in business all the time, the scaling problem. So, things that work very well at a small level don't work so well when you try to make them bigger. And the example I always give is trying to agree on where to have lunch. Right? Let's say you want to have lunch with three friends. You get an email thread, maybe it takes a little bit of time; but eventually you are going to find somewhere that you agree to meet for lunch--pick a time--and that's going to be easy. Well, if you have 200 friends, that's not a very good way to do it. Once you get a certain number of people, you need someone to pick when the lunch is and arrange it. You don't just say, 'Hey, guys, where are would you like to eat? And when would be good?' because you will never get that problem solved. Internet shaming is a lot like community shaming. Right? It's a lot like--it's a little bit like a small bound. My mother, who grew up in a small town, said, 'You know, you always felt that you could go behind a window, close the shades, and sneeze; and the next day someone would ask you how your cold was.' And, there's always been a lot of prying. There have been people whose lives were wracked because they did something embarrassing in their small town and everyone knew about it, and no one ever forgets. I still remember being with my grandmother, at church with my grandmother, and hearing two women say something like, 'Well, did you see Lillian last night?' and the other one said, 'Well, yeah. We know how her people are. You remember when her grandmother used to-- Right?' So, there's always been these long memories. There's always been these punishments that are handed out to people who kind of defy community norms. But the difference is that, look: If you got a big trouble in your local town or city, at the last resort, you could move. You could go to another city. You could start over. And people did. I mean, you know--it's an old joke in novels is the only thing you could do is change your name, move away, and hope to live it down. But people actually did that. That was a way of getting away of the mistakes of your past. And if you look at the Internet now, first of all, just the number--and also, I should say, the ease. It's not just scale. It's also the kind of transaction cost of shaming and punishing someone. Right? It is really cheap on Twitter, to get on Twitter and say someone should be fired. It takes you 3 seconds of time. It's enjoyable; you show the right moral character for all of your friends who are watching you. And then you go on with your day. Even in a small town, to gossip about someone required standing around and talking to your friends; and then you took the risk that there would be retaliation because those people knew who you were and could get back at you. You knew that there was a risk that it could happen to you. You were kind of embedded in a social network. On the scale that we have now, there's one Internet. There's nowhere to move away from it. You know, where does Justine Sacco, who was the person who tweeted a tasteless joke about AIDS but was obviously the kind of thing that people say in an off moment with friends--they make tasteless jokes. Their friends roll their eyes and give them a look. And they're like, 'Sorry, just kidding.' But, she unfortunately made it on Twitter. Somehow, it escaped--it was a relatively small-follower Twitter account. It went viral. And, she was on a plane when she made it; and so, by the time she landed, she had been fired. Right? She was on a long flight to South Africa, I believe. Where does James Damore, who wrote the Google memo--where does he go to get away? This is going to follow him every time he goes to get a job: employer's going to google him and this is going to come up. Every time he goes on a date, his date is going to google him and this is going to come up. You can't escape it. And it's forever. Right? People used to say, if the New York Times wrote something about you, that maybe it turned out not to be true. The New York Times made a mistake; they identified you as some sort of terrible person. Well, 10 years later, 20 years later, who was going to remember that? Well, now, thanks to Google, everyone remembers it. And so, you have this immense power to wreck lives that didn't exist 20 years ago. Partly because, if you look at the Damore memo, in particular, 20 years ago if you had even wanted to get that story out there in the first place, who was going to write a story about a non-managerial guy at a tech company--

Russ Roberts: Not famous--

Megan McArdle: [?] big company, where he's not famous, had no power over HR [human resources]; he's just a normal engineer. Say, you had gone to a reporter. The reporter would have been like, 'Sorry; I don't really understand what the story is.' Like, [?] 'You seem very mad at him. But, I can't spend the money to print that on paper.' Well, in the Internet era, the cost of printing things is cheap. You have all of these online outlets who have gotten rid of their expensive reporting. They've gotten rid of their expensive layers of editing. And so you have enormous numbers of people who are just desperate for any copies. And someone comes to them and says, 'Look at this thing that is going on, on Google,' there is an economy on the supply side of people just looking for people for being to outraged. I see it. Everyone sees it. Right? It seems to me that in a lot of ways the primary reason to go onto news media or social media right now is to find a reason to be mad. And, so, of course they took it. Of course, they ran with it. The actually cost to them of putting that up there is very little. They got a ton of clicks out of it. They sold out against those clicks. And so, you have this economy that has replicated that small town. But, first of all, without the mercy that those small towns have. Because, yes, they did wreck people's lives. Yes, it could be stultifying. And all the rest of it. But, they also took care of people when they were sick. They also felt bad about seeing the wreckage of someone's life, and would say, 'Yeah, maybe it's time to forgive him.' There's none of that on the Internet. It's all of the bad things we hated about small-town life, and none of the good things that made small town life rewarding. It's a really bad equilibrium, and I really think we need to look at: What do we do about this? Because, no one likes it. Even the people who are in it at the moment, even the people who are calling people out. You know, as the Stalinists found out with the purges: You could be the next person purged. Everyone is afraid. Everyone's worried about the call-out culture, even as they participate in it. And it just seems like it's a really bad and unhealthy way for us to be living; and we need to think about: How do we rein this is? Because, no one likes it. And it's quite destructive.

7:47

Russ Roberts: So, I'm very sympathetic to the basic point. And listeners have heard me talk about Twitter. As you say--both you and I are active on it. Anyway. Although, I--

Megan McArdle: I follow you.

Russ Roberts: What?

Megan McArdle: I follow you.

Russ Roberts: And I follow you. So, one could argue: The way to deal with this is the way I deal with it occasionally--I've mentioned--I took Twitter off my phone. Doesn't always last, but I took it off my phone. That's really more for mindless, just sort of scrolling instead of thinking about something more seriously or engaging with human beings. But, some of it is also--I think of it as the corrosive aspect on my soul--or my person, however you want to think about it. Some of the attitudes aren't so good for us. Or, I don't like what they do to me or the way they make me feel. And, you've really got--speaking as the economist of the conversation, you said, 'Outrage is really cheap.' Or you said something like that. I think that's the right way to think about it. But it raises a question--before we get into your essay--it raises the question: 'Why cheaply-expressed outrage has such power?' I hadn't really thought about this. Certainly many of the people we are talking about--there are so many examples, I almost feel like we shouldn't mention them exactly, because they don't need any more publicity than they already have. But, like, EconTalk is going to push the numbers over the top, right? Really make it bad for these people. But, some of these people, they had a hard time. The question one could ask is: Why? Maybe the problem is not so much the Internet as it is that a company would fire someone for making a bad joke. A company would fire someone for a memo that--when I read it, I was shocked at how thoughtful it was. It's not what I expected to be the kind of memo at Google that would get somebody fired. I've talked to some friends of mine at Google. And, they actually described--and I want to bring this up; maybe we'll get back; I think we will get back to this later. But, James Damore has appeared often, sometimes--I don't know how often--but he wears a shirt that says 'Goolag' on the front--G-o-o-l-a-g [evident pun on Gulag--Econlib Ed.] in Google's font and colors. And, in a way there's something obscene about that. To compare Google to a Soviet labor camp where people died regularly just from not having good enough clothing for the weather they were in, or enough food to keep them alive; plus, there was actual murder. So, something obscene about that. And at the same time--and I've never spoken to him directly. But, other Google people have told me that it's like a Soviet re-education system. That there's an intolerance and an authoritarianism, a--and, of course, they won't say this publicly, because they don't want to have the shaming and they don't want to be fired. But, it's an incredible thing, that that's the case. And it raised the question: How did that happen? How is it that--I think of it as just a variation on political correctness--how is it that the perception that something that has been said or written that's inappropriate lead to being fired? As opposed to real malfeasance? Right? Harming other people? Destroying company property? Letting secrets out into the world--being careless with confidential information? Those are the things that used to get you fired. Right? Not doing your job well. Now, expressing an opinion gets you fired? And of course I think that's also a part of the [?] for the Internet. So, why don't you react to that.

Megan McArdle: Well, let me see if I can mount the defense. One of the things that I love about you is that you are always charitable of the other side and try to make an intellectually honest--the case for the people you disagree with. And, let me try to do that with Google: Is, first of all, look: Angering your fellow employees has always been a firing offense.

Russ Roberts: Yup.

Megan McArdle: It's always been raised--you know, companies, they are not there to make a big statement about free speech and the values. They are there to do a job. And, if you are making it difficult--if you have angered enough of your fellow employees and made it difficult for them to work with you--well, then, you are probably not going to be working in that company for a long time. And that's fair. Right? That's just--

Russ Roberts: Those are the rules of the game.

Megan McArdle: Those are the rules of the game.

Russ Roberts: That's understood.

Megan McArdle: Right. But, it's also that it doesn't make sense for companies that are--you know, we have universities that are supposed to be the places for free inquiry. Now, we can ask--

Russ Roberts: I like the phrase, 'Supposed to be' in there.

Megan McArdle: We can ask about how they are doing, these days. But that's--that is part of their institutional makeup. It's not Google's institutional makeup, is to just fearless inquiry into the state of the universe. They do a specific thing. They have a specific culture. Add, on top of that, look: Google is under pressure from regulators because they don't employ that many women. And that--and, you know, if there are lawsuits, which I believe there are--that memo was going to be brought up in a lawsuit.

Russ Roberts: Yeah.

Megan McArdle: Right. And if you knew anything about it, that was going to put them in a weak position with regulators. And, again, Google, first fundamentally has to make sure the company is still running. And, so, yeah: They fired him. But I think that--and so, in making those defenses, they have a right to. You and I are both free market people; and companies can fire you because they don't like the way you cut your hair. I think that would be kind of dumb for a company to do. But, it's within their rights. That said, I think that begs the question a little bit. Right? Which is, that, 'Well, he created a situation where Google had to fire him.' And I think that that's true. But let's look at the environment in which that situation required firing. Right? And that is what I think we are both talking about. Is that, it's not so much that they fired him because they created a problem for them. It's that: Why was he a problem for them? And that, I think is the million-dollar question: How did we get to the point--and I wrote in the essay--you know, you talk about the Googl-lag [Goolag] and the Soviets. I don't want to morally equate this kind of shaming and fear to what happened in Soviet Russia. Because, in Soviet Russia people were actually in fear for their lives, often.

Russ Roberts: Rightfully so.

Megan McArdle: Rightfully so. Maybe. Well, let me take that back. I do not think that the Soviet government was right in making them fear for their lives.

Russ Roberts: Yeah. No, no, no. I didn't take it that way.

Megan McArdle: They were correctly in fear for their lives, let us say.

Russ Roberts: Their perception was accurate.

Megan McArdle: Yes. Um, I'm having more and more conversations that sound like conversations that I have had with people from former Soviet countries. And, from my readings, I've been reading more about life in the Soviet Union. Where, people say, start by saying, 'Well, of course I would never say this in public.' And, like, you know, 20 years ago, I would never say this in public with maybe, 'I loved The Bell Curve'--Charles Murray's book on IQ [Intelligence Quotients], right?

Russ Roberts: Can't say it.

Megan McArdle: There have always been things that you can't say in public, for whatever reason. Fifty years ago, it was, 'Hey, we should let homosexuals get married,' right?

Russ Roberts: Yep.

Megan McArdle: That was something you couldn't say in public. We changed that. Which is great. But, the number of topics seems to be exploding, on which I hear this. Right? And a lot of them don't seem to be that--you know, it's discussion of abortion; it's discussion of trans-rights; it's discussion of all sorts of things that 5 or 10 years ago you could talk about.

15:58

Russ Roberts: Well, it's more, it's so much more than that. I mean, it's discussion of men's and women's roles--differences, if any. I mean, the Google example is a perfect example of that. Of course, Larry Summers was fired for a similar, inappropriate remark.

Megan McArdle: When I was in college. Right? People on the Left, we felt like we had to argue and go do battle and fight all the time. And there's now this feeling that, like, you don't fight. You just say this person is a racist. Or they are a misogynist. Or they are a bigot of some kind. And then the conversation is over and that person's life is ruined--should be ruined. Right? And the ease with which students are now calling for professors to get fired--I mean, I get that they are, like 20, and they don't understand that when you are 50, that calling for someone to get fired is just calling to--how big a thing they are asking. I think that they don't understand that, when they routinely ask for people to get sacked from their jobs. But, at the same time, there is the sense of like, instead of focusing on grievances and how to repair those grievances, a lot of these grievances have to do with the people instead of things that you should do. Or they have to do with destroying the bad person. And, again, I think that is a thing you see a lot in small towns, a lot in certain small, band communities. But again, people in the small band communities, there's also a human connection that kind of mitigates how far they are willing to go to destroy someone. And we've pulled that part of it out. And so I think it is a cultural shift. But, I think that that cultural shift is combined with a, with a technology; and that both of those two things are kind of heterodyning each other into something that feels unhealthy for everyone.

17:54

Russ Roberts: Yeah--the part that I find deeply disturbing--and I'm trying to write an essay on this at Medium; and I'll put a link up to it--this story of, I remember--and if I finish the essay. But I feel like--and, again, I'm not sure this is an Internet phenomenon. I think the Internet amplifies it. There's a--people have always been intolerant. People disdain--can be a very attractive emotion, seductive emotion--hate can be, tragically, a seductive emotion. And, the willingness to categorize people who don't see the world the way I do as not just disagreeing with me but worthy of contempt, dishonor, and exile--which is really in a way what we are talking about here. Right? Firing someone is like saying, 'This person belongs in the wilderness. They are not worthy'--it's not just that they are not worthy of a second chance, when someone makes an offhand remark that gets, say, misinterpreted or was a mistake. 'Their worldview is dangerous. And therefore, I am justified in vilifying them and wanting to push them into exile.' And that is what I find--it's not really--it's not the point of your essay, but it's a very related point, for me. It's the ease with which people are willing to dismiss other human beings as unworthy. And that is, I think, really strikes at the fabric of civilization. It certainly strikes at our common, our day-to-day interactions, culturally and socially. And, we have--we are in a moment in American history where there aren't a lot of feedback loops that tamp that down rather than there's a bunch that expand it. And the Internet is one of those, right? Where you can safely gang up on someone as being unworthy.

Megan McArdle: Yeah. You said two words that I think are important, one of which I will tweak and one of which I will just enthusiastically agree with. And the first is, you said 'unworthy.' And I think, actually, the word I would have used is 'worthless.'

Russ Roberts: Yeah, even better--

Megan McArdle: Is that these people have no worth at all. That anything can be done to them. This is how people used to talk about criminals. And, thankfully, I think conversation has shifted a little bit. Even conservatives are starting to talk about rehabilitation and the fact that this is a human being, and who may have done something terrible, but who we would not like--every life is a universe. Right? When someone dies, a universe ends. And that, when you--it doesn't matter what that person has done: we should care about the fact that there is a universe between that person's head and we should save that universe if we can for as long as we can. Right? But we've shifted it now, to our political opponents, where there's this sense that, you know, that if they disagree with me on big, fundamental issues, they should just be destroyed.

Russ Roberts: It's not just big ones.

Megan McArdle: Yeah.

Russ Roberts: It's any small ones. I'm serious. It's really--because they all go together, right? You've got this idea that, you know, 'Well, if you don't feel this way about this, then obviously you are going to feel this way about that.' And of course sometimes that's true. 'And therefore, I don't even need to explore the rest of your worldview. You're one of them.' And I think that's despicable. It's a sad, sad thing. And that goes with the other word you said, which is 'exile.' And this is really, I think, where things have shifted. Where there is no longer simply this sense that--now, again, we've always used 'exile' for--journalism has always used 'exile' for example for plagiarists. If you--even plagiarists have gotten away with it. There are still some people, plagiarists, working. The one thing you absolutely never, ever, ever could do was make up a story.

Russ Roberts: Yup.

Megan McArdle: That was it. You would never work in journalism again. If you, you know, you can get details wrong. We've all, unfortunately, done that. Or you misspell someone's name. But if there was any evidence that it was malfeasant, that you had just fabricated something--it's over. Right? Every community has these thing. Lawyers have their canon. You cross that line and you're out. But, those offences used to be like a small number of things. And they are growing to be a large number of things.

Russ Roberts: They are also well-delineated. Everybody knows what it means to make up a story. To be a sexist or racist, the expansion of those categories is what I find alarming. And, I don't know why exactly it's happening. Obviously, it's not so interesting to speculate.

22:45

Russ Roberts: I want to talk for a minute, though, about how you and I, who write publicly, or talk publicly, as we're doing now, might respond to this. So, one of the things I already learned from our conversation today is the number--it may be right--we realize how many times I say to someone, 'You're the only person I can say this to.' It's--I mean, usually, other than my life. What I mean is, 'in public.' Right? I have a couple of friends who I know will not vilify me, if I concede, I believe, x, y, or z. But, it's weird that I have to say that. And I mean it, too. There are a lot of things that can't be said. So, one reaction to this, which is not my first thought, but it's an interesting one, perhaps, is to say, 'I'm not going to let the Internet shaming mob cow me. I am not going to be--I'm going to bear the price. I'm going to face the consequences'--knowing that they're there, of saying things that are politically incorrect or socially unacceptable if indeed I think they might be true. And I might qualify them. Knowing that of course qualification doesn't help. You know, saying, 'I'm not sure, but,' doesn't really help. You are still going to get attacked. So, that's one response. You recently wrote, for example--I don't know where you wrote it; I saw this on Twitter. You had the temerity and the gall and the courage to say that there might be benefits from climate change, even though it's maybe the case that the costs will massively outweigh and overwhelm the benefits. But, that there could be benefits. Talk about the reaction to that and what you think of this idea of just sort of speaking truth as you see it, even though you are going to bear a cost. Because, you bore a cost for that.

Megan McArdle: I did. Actually, I tweeted this a long time ago, but it's something I've often thought--is, that you need stories on climate change and it's inevitably just a litany of all of the horrific things that are going to happen. Right? And I should put my cards on the table: I believe in anthropogenic global warming; I think that because there are feedback loops that are poorly understood, I don't want to mess with the only climate we have. I don't want to run a one-way experiment we can't take back on a single system that I need to survive. And because of that, I have some sympathy with people like Matt Ridley who are lukewarmists--they call themselves--they think it's happening; they think it's no big deal. There aren't that many kind of true, 'This just isn't happening; this is all a big lie.' In the skeptic community, they are mostly lukewarmists at this point. I have sympathy for them, and I read them. But I also think, I want an insurance policy. And so, I think we should have a carbon tax; I think we should be funding at the government level hog wild research into renewable sources of power and low-carbon sources of power. I feel pretty strongly about this. That said, I'm also kind of not in the full climate camp and I get a lot of pushback from them because I don't simply say, 'Well, therefore I'm just going to do the litany of horrors.' But I do this with [?] the minimum wage, right? Now, I don't think the minimum wage should be $15 an hour. When I read about it, I have to acknowledge there are some people who are getting more money because of this. Maybe they are not the people we are trying to target. Maybe they are affluent teenagers or retirees who are pretty skilled who went back into the workforce because they enjoy getting out of the house. But, that said, those people are going to benefit. And, you don't write a piece about the minimum wage and just say it's all cost, no benefit. I think there's a disemployment effect: I think there are people who lose jobs and those people are usually the most vulnerable, people that we want to help. But that said, there are costs and there are benefits and you kind of have to acknowledge both sides of the ledger. And you don't see that on climate change right now. You just very rarely do. It's in the IPCC [Intergovernmental Panel on Climate Change] Report--you can see they do--it's not that scientists don't try to do the net. It's the way it gets reported is this kind of litany of just terrible, terrible, terrible, terrible, terrible. And so, I said I would like to see a good climate, environmental journalist just do a piece on, or mention, even, in another piece: What are the actual net upsides? Which places are going to benefit from this? Because I presume some of them will. Which is not to say we shouldn't do something about climate change any more than it is to say that when I say some people benefit from minimum wage--now I want a $20 minimum wage. I don't; but I acknowledge tradeoffs. And, the reaction to this was just a bunch of people tweeting, 'Haha. Now maybe we should do articles on people drinking bleach. Maybe we should do articles on how great the Holocaust was.' And, like, you know--

Russ Roberts: Yeah. 'The Nazis made the trains run on time and that was good for, whatever. People learned about timetables, about how to run a train system.'

Megan McArdle: Yeah. The Holocaust and global warming are kind of morally not in the same category.

Russ Roberts: Not to me and you. But to some people it is. That's what we're talking about.

Megan McArdle: But everything seems to be in that category. Right?

Russ Roberts: Yep. Correct.

Megan McArdle: So, that's the--there's an increasing number of things where the first go-to is, 'Why don't you talk about how great the Holocaust was, if you are going to say this?' Well, the Holocaust was really a kind of uniquely terrible--it wasn't as large as the Communists' death toll. But it was worse in a lot of ways because it was so organized, and it was organized against a particular group of people. We don't have to get into why the Holocaust was bad. I think we all agree it was. We can take that as written. But it's really like a unique moral horror in the history of humanity. And, to equate everything to that--well, if everything is the Holocaust, we now just don't have any moral language to talk about anything lesser. And also, people don't actually--it worst against your cause in the end. I really do think this.

Russ Roberts: Well, that's the other part of it. It infuriates people and causes them to resent being called Nazis, for example. Or being presumed to be the equivalent of a Nazi. And that pushes those people--not Megan McArdle perhaps, thank goodness--but some people to then say, 'Well, I need to respond with as much vehemence, vitriol, and vituperation as you accused me.

29:36

Russ Roberts: But I want to come back to the point of: Did you do that with some trepidation? Or, was that fun for you? And do you think we should do more of that, to try to open some of these topics up for conversation?

Megan McArdle: Yeah. I think 15 years ago when I started doing this, I enjoyed getting a rise out of people more. And now it just makes me tired.

Russ Roberts: Yeah. The thrill is gone.

Megan McArdle: In part because it's gotten quite predictable. And I should say it like--that wasn't a dangerous thing for me to say. I never thought, like, 'I can get fired if I write this.' This is not--

Russ Roberts: You could have--

Megan McArdle: You're making fun of me. Which is true. But well, Bloomberg is not going to fire me because I suggested that climate change might occasionally have some upsides and we should know what they are. Bloomberg's a pretty good place about opening query and looking into--this is fundamentally like we do a lot of technocratic stuff, and that's a technocratic question--is, what are the tradeoffs here and what are the policy tradeoffs of doing stuff? I write about that all the time. But, now, it's not fun to engage with people who are so angry. I think about this with my trolls all the time, because I have people who are quite dedicated to trolling me. Mostly I meet them on Twitter.

Russ Roberts: Yep. Me, too.

Megan McArdle: I don't even block them, because blocking them is an engagement where then they know they've been blocked and they get angry. It's like, they're still talking to me; I just don't respond. But, you know, I'm not that interesting. Like, this kind of personal rage at me, this kind of personal hatred for me--you know, you should have something better in your life than that. And I think that a lot, about a lot of things: because you should have something better in your life than hating another human being--

Russ Roberts: Well, who you don't know.

Megan McArdle: Who you don't know; I'm down on hatred in general. I don't think I hate anyone that I've ever known. And, because, you know: we have, what? 70, 80 years? I'm in middle age now, and it's such a pitifully short period of time. And to waste any of it--you know, anger is different. Anger is a natural response to things that are often outrageous. But hate--this wishing someone ill, wishing terrible things for another human being--it's destructive. It plays no good role. And it is chewing up precious seconds of your life that can be better dedicated just for you: forget the person you are hating. Right? Just for you, it can be better dedicated to something else. And I think that that is kind of the other cultural thing, thread, that we are talking here is that we seem to be extraordinarily angry all the time. We seem to hate a whole lot of stuff. And I think about the Trump election, right? And I was pretty critical of Trump--I was pretty critical of Hilary Clinton, too, for what I think were good and sound reasons. And I said--at one point, I got in this debate with my readers, many of whom were Trump voters; and they said all of these things about bad things that they thought the other side had done to them. And I was like, 'Well, look, you know, I agree with a lot of this. There were people--elites kind of abuse their power in a lot of ways. They've been contemptuous of you. All of those things.' That said, here is not a good argument. Right? 'Well, my new fiance steals from me and she's a drug addict and she hates my kids and sometimes she hits me. But, boy, my ex-wife hates her.' Like, that's not a good reason to get married. Right?

Russ Roberts: Yeah. Or--or--I think the simpler point--and I'm up on a really fragile soapbox here, but I think the idea of responding to contempt with contempt is not a healthy thing. And I think--it's a human thing. I get the desire for it. So, I want to force you back to this topic of, this question: What you should do about it? I agree with you that it's no fun to get hate mail that wishes you ill, or death. And that's really unpleasant. And I think those of us who are[?]--I'm not very much in the public eye, but to the extent I am, I get those and I try not to let them get to me. They usually don't. But they still--sometimes they do. Should I fight back against that urge to hide and say what I feel, even when I know it's going to generate a lot of antagonism and possibly lead to people--becoming a pariah? Which is a phrase you use in the piece; and it's really the right phrase. It's a word that hardly ever gets--you know, it's almost gone out of fashion, to be a pariah. I mean, socially unacceptable. It means, again, unworthy; or worthless. Even a little bit dangerous, perhaps. Or perhaps someone who has to be pushed out of the camp. Do you think we should just be ourselves?

Megan McArdle: I think there are a number of questions there. First is obviously you're kind of--I'm not going to tell anyone they are going to have to stand up and immolate their career for the sake of ending this. I will admire people who do. But, realistically, people have mortgages to pay, and so forth. So, like, I'm fighting against it as best I know how. Which is trying to do it somewhat kindly. And, there's this great quote from a rabbi whose name now escapes me--because I'm in middle age. He said, 'When I was young, I admired people who were clever; and now that I'm old, I admire people who are kind.'

Russ Roberts: Yeah.

Megan McArdle: And I think that that's really true. Clever is easy. Kind is hard. And kind is, I think more effective. I'm teaching a class at Duke this semester on persuasive writing. And, the thing that I am--more than anything I am trying to drum into my students' heads is that the minute you are clever and mean and outrageous, you've lost someone. That's it. They will never listen to you. The minute you are sarcastic to them. And like, it's fun. I get it.

Russ Roberts: It's so fun.

Megan McArdle: I love being sarcastic. Because, I'm good at it. And we all love things we are good at.

Russ Roberts: Yup.

Megan McArdle: And I've basically stopped that. I don't always stop. I have the occasional column where I kind of let it all hang out. But I try to really minimize those columns. Because, they are fun to write; and they are fun to read if you already agree with me. And anyone who doesn't just turns off and doesn't listen to a darn thing I say. And, so, I think, you know, the kind of, 'Well, I'm just going to go out and say whatever I think and just shock people, and I'm not going to pay attention to those people'--I think it's understandable because, again, when the categories shift not just to so many but so rapidly--like things that everyone, a majority of the population believed 5 years ago are now things that brand you just a moral horror--

Russ Roberts: Like, being a football fan--is on the verge of that--I have a feeling. Right?

Megan McArdle: Yeah. And, I actually, like, I actually, like, I am one of the people who thinks--I don't have kids, but if I did, I wouldn't let a boy play football [because of the controversy surrounding concussions--Econlib Ed.]. And I think there is something--I enjoy watching it, but I also understand like what's happening inside those guys' brains. Like, they're consenting adults, but I don't have to watch everything consenting adults choose to do to themselves for money. Or for the love of victory or for any other reason. And, I can't watch it. Because it's tragic.

Russ Roberts: So, I'm uneasy about it, now. I'm not sure that the scientific evidence is open and shut. But there is some, clearly. But I'm just raising the question: Things that appear to be totally normal, in short order may turn out to be socially unacceptable soon--

Megan McArdle: Yeah--

Russ Roberts: Which is weird.

Megan McArdle: Yeah. And I think that's not possible to maintain. And again--you know, I talked about the Soviet--that's what it felt like. And not in the early kind of purge-days, although there is a lot of that. I remember having a weird debate with a Russian office mate at a summer internship when I was in business school. And he was--first of all, like, all the Russians I knew in the United States prior to that--I'd known a lot, but they were all Jews. Because they were in this huge exodus of Jewish people from the Soviet Union. Here's the first ethnic Russian that--and it was interesting to me because he had very different attitudes from the previous Russians I'd known. And he said to me--and he was basically defending the idea that we should be able to say, make, racist and sexist jokes. And I was very upset by this. It was late in the night. And he said, 'Look, you've got the wrong idea about the Soviet Union. Under Brezhnev, the risk wasn't that you weren't going to get sent to a camp. The risk was you would lose your job and your apartment. And then no one would go on and talk to you, because they knew it was dangerous to talk to you because they might lose their job and their apartment.' And again, I don't want to draw too much moral equivalence. And I also want to actually stand firm. You should not tell racist jokes. And if people do tell racist jokes, you should tell them that's not okay.

Russ Roberts: And don't laugh at them.

Megan McArdle: And you definitely shouldn't laugh at them. But you should also, just like, there is a good social stigma on racist jokes. And we should maintain that social stigma. I haven't changed my mind about that. But that has stuck with me, as something that I hadn't understood before. And I think that this is the kind of soft fear--right? That--and you said, his example was you told a joke about Brezhnev that--you wouldn't get shot, but you might lose your apartment. And as things, as these categories widened, were pulling in more and more stuff that there's no social consensus that should be banned. Right? And so, it's very similar to that. Is that, there's people who are now feeling afraid because they might way something that isn't just telling a terrible racist joke but suggesting that maybe women and men have different interests, and are not going to be equally represented at tech companies. And that even some of interests might be genetic. And this is something that--I am a woman. I'm in a pretty mel[?]field. I've always done pretty mel[?] jobs. And, it doesn't in any way offend me. If it's true, it's true. The universe isn't going to please me. Right? And--as you pull those things in, you create this climate of everyone feeling like they have to lie, in public. And, what's interesting about reading the Soviet, those Soviet era things, is how many people--Orwell talks about this, lots of [?] talks about this. It's the feeling that making you tell a lie is the point. That, there's no, like, greater point of what you are saying except that they have undermined your character by forcing you to lie for the regime. Is that, they are making you weaker. And that people, under Soviet regimes, really do seem to feel that that is true. I don't know that it is true. But they do seem to feel that that is the case. So, to go, but to go back to--to go back to outraging people--there's a reason that the people who do that are people like Milo. Right? And you get--I don't want to outrage anyone--

Russ Roberts: That's not what I mean. That's not what I meant--

Megan McArdle: No, no, but there's a real thing of that. And that's one of the things that restrains people. Even if you were--you are worried about this and you want to just have a non-confrontational, non-outrageous, non-nasty public conversation about things that matter. Right? It matters whether women have different interests in that there's a genetic component. Because that's going to tell us our company is discriminating. That's how you assess whether a company is discriminating. Right? Is, you can see what the end result is. Well, if there is a plausible end result that isn't discrimination, you've got to take that into a fact, and into account--

Russ Roberts: Well, I--

Megan McArdle: A suspect.

41:40

Russ Roberts: I think there is a much more important reason to take that seriously. And that's how we raise our children. And--really, it's ironic. Because, we've been talking about the Soviet Union. The Soviet Union was based on an ideology part of which was about the fact that human beings are infinitely malleable, and we just need to make them whatever we want them to be. And I think that's the road to the Gulag--the real Gulag. And I see us taking steps down that road, in mistaking--potentially; I'm open to the possibility that maybe men and women really are the same--I don't think they are--we know they are not physically the same but whether anything beyond that is important, is a legitimate scientific question. And, if it's off the table to treat it as a legitimate scientific question, we will do a bad job raising our children. We will do a bad job creating, making our choices.

Megan McArdle: We'll do a bad job creating a society in which both groups of people will be happy--

Russ Roberts: Before we go on, I want to challenge one thing at the root of your concerns; and then I want to talk about some of what I think we can do about it. And then you can suggest whether you agree or what your own ideas are. But, the thing I want to raise is: Some would argue, perhaps legitimately--I don't agree, but I'm not sure how I feel about this, actually--that shaming is good. That, all of this stuff that you are worried about--yes, people are scared about what they say: Well, they should be scared, goes this argument. Because, words can hurt people. Words are important. And, it's a glorious thing that we have made people sensitized about the harmful effects of their words. And, the things that you are decrying, Megan, are actually good. One extreme version of this would be--and this drives me crazy, but I'll put it forward anyway: 'Well, if you have nothing to hide, you have nothing--if you don't say anything bad--there's nothing--you are not going to get hurt.' All this shaming is to punish people who tell disgusting jokes, write grotesque memos that say things at the water cooler that intimidate and harm people. And those people should be shamed.

Megan McArdle: So, I think that that is actually true up to a point. I've made this point before. In fact, the first column I ever wrote on online shaming, which was based on Jon Ronson's excellent book on the topic, which [?] and in which I coined the term 'shame-storming,' which sadly failed to catch on, denying--

Russ Roberts: surprising--I'm surprised. It's a great name--

Megan McArdle: Internet meme, denying immortality. Yeah. Somehow, I try to coin these things periodically, as all writers do. And mine never catch on. Julian Sanchez, on the other hand, like, just tosses them offhand and they are always amazing, you know, apt and meaty. But, yeah. Look. When people tell racist jokes, and their friends turn around and say, 'That's not funny and you shouldn't say that,' right? That's useful. Completely useful.

Russ Roberts: It's how society evolves. Those are the norms--

Megan McArdle: How society has to happen. There is no society--

Russ Roberts: Those are the Smithian norms of judgment. And people's desire to be lovely, and to be respected by their friends. And it constrains behavior. It is great.

Megan McArdle: There is no society that gets along without that. That's not what we're doing at this point, though. Right? [More to come, 45:25]

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Thinking the Unthinkabletag:www.econtalk.org,2017://2.153712017-10-11T16:44:41Z2017-10-11T17:40:11Z Given the scale of the digital revolution thus far, we can be reasonably sure that technological advances will continue to enhance our lives into the future. But how widely will such advances be shared, and why is it up...Amy Willishttp://www.econlib.org Given the scale of the digital revolution thus far, we can be reasonably sure that technological advances will continue to enhance our lives into the future. But how widely will such advances be shared, and why is it up to us? This week, EconTalk host Russ Roberts welcomed author and Silicon Valley guru Tim O'Reilly to talk about his new book, WTF: What's the Future and Why It's Up to Us.

O'Reilly argues that we shouldn't look at technology as being labor-saving. Instead, we should focus on how it lets us do more. Today's companies are "infused with the digital," creating new platforms and redesigning themselves all the time. (Amazon is O'Reilly's prime example.) Now we hope you'll share your reactions to this week's episode with us. We love to hear from you.

1. Is new technology more likely to replace workers, or make existing workers better? To what extent will workers' lives be equally augmented by such advances?

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2. How will autonomous vehicles challenge ride share services such as Uber and Lyft? What does O'Reilly recommend the ride share companies do? What is the likelihood of Roberts seeing an on-demand ride share service with autonomous vehicles in his lifetime?

4. Both Roberts and O'Reilly are concerned that our education system isn't preparing kids well for the future. How do we give kids today access to the right kind of skills and knowledge they will need to be successful? What are these skills and knowledge bases?

5. What does O'Reilly mean by "the divine right of capital," and why does he find it problematic? What might be done to mitigate the effects of this new phenomenon?

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Tim O'Reilly on What's the Futuretag:www.econtalk.org,2017://2.153612017-10-09T10:30:00Z2017-10-12T12:28:20Z Author Tim O'Reilly, founder of O'Reilly Media and long-time observer and commenter on the internet and technology, talks with EconTalk host Russ Roberts about his new book, WTF? What's the Future and Why It's Up to Us. O'Reilly surveys...Russell Robertshttp://www.econtalk.org
Author Tim O'Reilly, founder of O'Reilly Media and long-time observer and commenter on the internet and technology, talks with EconTalk host Russ Roberts about his new book, WTF? What's the Future and Why It's Up to Us. O'Reilly surveys the evolution of the internet, the key companies that have prospered from it, and how the products of those companies have changed our lives. He then turns to the future and explains why he is an optimist and what can be done to make that optimism accurate.

Highlights

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Podcast Episode Highlights

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0:33

Intro. [Recording date: September 6, 2017.]

Russ Roberts: Our subject for today is Tim O'Reilly's new book, WTF?: What's the Future and Why It's Up to Us.... Now, your book is quite amazing. It's part memoire, part history of technology. There's also some preaching about how we might mold the future. And to start with, I want to talk about how much your book reminds us and makes us pay attention to how much and how fast the world has changed in recent years. Here's a quote from the book where you talk about going back, way back to the past--to 1998. And 1998, it's hard to remember--it's less than 20 years ago. So, here's the quote--of course, some of my listeners--this is not the quote yet--some of my listeners won't appreciate this quote because they are 19. But, for those of you who lived through 1998, it will remind you of just how much things have changed. Here's the quote now:

Software was distributed in shrinkwrapped boxes with new releases coming at best annually, often every two or three years. Only 42% of U.S. households had a personal computer, versus the 80% who own a smartphone today. Only 20% of the U.S. population had a mobile phone of any kind. The Internet was exciting investors but it was still tiny, with only 147 million users worldwide, versus 3.4 billion today. More than half of all U.S. internet users had access through AOL [America Online]. Amazon and e-Bay had been launched three years earlier but Google was only just founded in September of that year.

End of quote. Less than 20 years into this revolution, the speed of it is really rather extraordinary.

Tim O'Reilly: Yeah. You know, the thing that's interesting is the speed is extraordinary; but, there's a really interesting economics lesson in it, also, which is that new technologies typically take 20, 30, 40 years to really affect the economy and productivity. Amazon has been around now for, you know, 22 years. And it's really--the major impact on retail beyond bookselling are really only starting to be felt now. And we're only starting to see the articles that say, 'Oh. Maybe it isn't going to be the death of retail. It's just different.' Because, there's starting to be articles about Amazon actually hiring more workers, or just e-commerce in general leading to different jobs rather than, 'Well, yes, people standing in stores are being put out of work.' But it's actually kind of amazing: numbers of jobs being created in warehouses, in delivery. And this amazing capability that we didn't have where you could say, 'Oh, I need something,' and have it show up. Sometimes even the same day. And that, to me, is this parable that we also saw in the Industrial Revolution, and that we forget in the early stages of a new economic revolution. And that is, that technology lets you do more. And, you know, so, going back to--I always like to think about the Luddite Rebellion. And, imagine that, well, you know, we started using these machine looms and they say, 'Great. Now we can make everybody their one suit of homespun very, very quickly.

Russ Roberts: Yeah.

Tim O'Reilly: Instead, no: it was all of a sudden, you know, people could have more clothes. Fashion became something that wasn't just for the very, very rich. Ordinary people were able to change and update their clothes. And now, of course, clothes are a commodity and a disposable. And, so, part of the question that I ask in my book, which really is meditation mostly about Silicon Valley technologies but more broadly about technology as a whole, is: What do we have to do differently to accelerate the progress towards making the winds that we get from technology come more quickly? And, get out of the mindset that says, 'Oh, this technology is going to destroy jobs'--because, yes, it may well do that. And instead start asking, 'What new jobs will it create? What things were previously impossible that it will let us do?' You know, back in the early, Industrial Revolution, they had no idea that we would fly through the air; that we would be able to move goods all around the world incredibly cheaply. That we would build a tunnel under the English Channel. That we would build skyscrapers half a mile high. None of that was in the imagination. And now, here we are, with this enormous failure of imagination about what might the cognitive technologies of AI (artificial intelligence) and what's happening on the Internet make possible in the way of a future economy? And so, I don't have answers for that. But, I do know that there are certain design patterns that you see in the great companies of how they actually drive forward. And one of those things is they don't simply try to cut costs. They don't see technology as simply labor-saving. They'll see technology as a way to do more. And part of my call to action in the book is: Let's get out of this financial, market-driven, this is all about improving, you know, cost structures and making companies more profitable so their stock prices go up; and instead say, 'What problems can we solve now?'

6:47

Russ Roberts: One of the things your book reminds us of is the--how much of our world that we enjoy today, that's information-based or digital--is, was created by passionate people. Passionate about a solution, passionate about a technique, passionate about creating a tool. I want to go back to something--I think you mentioned this twice in the book; and it grabbed my attention, because I've mentioned it before on the program--that when Amazon first started, I was very uneasy entering my credit card into an open space on my computer, thinking, 'This could be bad. This could end up really badly.' And I was talking to the CEO [Chief Executive Officer] at the time, and I remember him saying, when I said--he said he ordered a lot of books on Amazon; and I said, 'You do? You give them your credit card?' And he said, 'Sure.' And I thought, 'Oh. Okay. Maybe it's all right.' And I went and did it; and I found out, I could get all these extraordinary books. But I want to raise the possibility, which you allude to in the book, that creating that confidence--that you could give your credit card to a stranger--not literally to a stranger--to a website, entering it into a website's database was okay. That changed the world in ways that you can't begin to think about. Just an obvious thing that that does is it allows Uber to exist the way it does, which is extremely pleasant, not to have to take your wallet out, worry whether you have enough money, go through that transaction, and just--it's done. To have your credit card quote "on file" is just a wonderful thing, that now we just take for granted. But it was not obvious that it was going to happen.

Tim O'Reilly: That's right. And I actually talk about that in the book, this idea that often these technological leaps forward require thinking the unthinkable. And we don't even know until--in retrospect it just seems so obvious: Why would you not do this? But, the example I give regarding Uber and Lyft is: We actually had connected taxi cabs; and what did we do? We put a TV screen in the back and a credit card reader in the back. It was just like the old days of movies where you filmed the stage play and then bit by bit they figured out, no, actually you could move the camera around, you could do different takes and then stitched them together with editing. And we invented movies. And, same way: it took a while. And people can even have the idea, but it doesn't all come together. So, there's a guy named Sunil Paul who in 2000 filed a patent for a whole set of ideas about how a smartphone could be used to coordinate cars, could support fractional car rental--all kinds of things that were really part of today's world. The thing that that really illustrates is you can have an idea and the world is just not ready for it. There weren't enough smartphones. And Sunil kind of took a run at it and couldn't make it work--couldn't get funding. And then later he came back to it, but by then it was too late: Uber had started. And it's also really interesting if you look at how that whole market evolved: you see how markets kind of invent things together. People get an individual piece and then someone else gets a different piece, and then they get assembled in magical new ways. So, Travis Kalanick and Garrett Camp came up with that marvelous idea that a smartphone in the hands of a driver and a smartphone in the hands of a passenger could be used to coordinate pickup in real time. That was that magical user experience of Uber. But they thought about it for black cars--it was sort of an app for rich people. And it was Sunil who came in with a company called Sidecar, which was rapidly copied by Lyft, that kind of had this idea--ordinary people coming and doing this in their own cars. Uber didn't actually adopt that till a year later. And so, then this market sort of exploded. But, it was really these two streams of ideas that were both needed, because, you know, John Zimmer and Logan Green, the founders of Lyft, had previously been working on a startup called ZimRide which was inspired by the jitneys in Zimbabwe. It wasn't actually named after John Zimmer but after Zimbabwe. And it was a web app for coordinating long-range travel. And then when they saw Uber, they went, 'Wow. This would be a great way to get to our vision of a future transportation network that's a 21st century version of those jitneys that supply public transportation in Zimbabwe.' And, so, you see this sort of magic of somebody has an idea; and then it makes somebody else have a different idea. And then there's this game of leapfrog. And I've watched this throughout my career. And kind of back to credit cards on the Internet--think how long it's been. It was, what? Twenty years almost between Amazon One-Click and Uber's realization that you could do one click in the real world. Apple was pushing Apple Pay, which is like, 'Wow. We'll just use your smartphone as a token instead of a credit card.' It was [?] say, 'No, we'll just store your credit card and [?] the act of consuming the service will trigger payment automatically.

12:52

Russ Roberts: So, I made a list, actually, responding to what you wrote about Uber and Lyft, and you had a lot of interesting observations on them and we may come back to them. But the point I was thinking about, to echo what you said a minute ago, was: Let's make a list--and of course it's a very partial list--of what had to be in place for Uber and Lyft and others--Airbnb being another example--for them to exist. So, lots of people use smartphones, for sure. You mention that. People being able to pay for things with their phones--so, a credit card system that generated enough trust through experience and software that you could be comfortable that you wouldn't be constantly having your identity or money stolen. GPS [Global Positioning System]--location, on your phone--which is crazy. I mean, that's amazing. We don't even think about that, either, but that's an amazing thing. A little bit scary, too, but also amazing. The underlying algorithm to align people with cars without having to have like a dispatcher figuring out, 'Who is closest?' That's a mind-blowing achievement, I assume. I assume some really thoughtful people did it. An interface on your phone to make that whole thing pretty straightforward, really shockingly straightforward. And then, finally--and this may be as important as all the rest--a way to ensure trust without heavy, top-down regulation or monitoring of drivers using the rating system of both customer and driver. Which, as you point out--I think you say this--it came from e-Bay. Which--it just--that's so fortuitous--all those things had to be there for this to happen. Nobody who did those individual things planned that it would lead to Uber. Uber is a fantastic--and all these companies are fantastic examples of emergent phenomena that couldn't be designed--that could have been, of course, at enormous cost; but they emerged through different pieces of design, but mainly pulling these different technologies and insights together.

Tim O'Reilly: Yeah; and there's one other piece--I totally agree with that list. And it is astonishing when you look at the way these pieces gradually were accumulated until somebody could put them together in a novel way. And again, some of those actually--you had to think about them--they really are being delivered as services. This is something I started talking about starting around 2000, was that the Internet was becoming an operating system with services like location, like payment, like identity. And the applications like Lyft and Uber are examples of that in the real world. We now have this sensor-infused world where things are connected to the Internet, where there is this data services that are provided by third parties. So, Uber doesn't build its own payment service. Lyft doesn't build its own payment service. This is just something that you can get from someone else. So, that kind of comes back to this really interesting idea in economics of why it takes 30, 40 years for a new technology to really show up in the productivity status, statistics. There's a wonderful book by an economist named James Bessen--

Russ Roberts: --Former EconTalk guest. We talked about that book. It's a great book.

Tim O'Reilly: Yeah, it's a great book. And just this idea that you have to have--a lot of pieces come together. It wasn't just those weaving machines. He talks about the weavers in the 1840s, Lowell. And you have to have a critical mass of people who have the skills to use the technology. You have to have people who can fix the technology, who can extend the technology. But I wanted to come back to this one thing that was missing from your list, which is that critical mass of buyers and sellers.

Russ Roberts: Yep.

Tim O'Reilly: And, it's interesting, because the reason why Uber and Lyft are still losing money is that they are competing very hard to get and maintain that critical mass. And, I'm not sure--it's sort of interesting because it's hard to say what would happen if they weren't spending all that money. If you look at the earlier waves of the Internet, things kind of evolved at something of a natural pace. I mean, sure, Amazon raised a lot of money. But, Google grew pretty organically. Facebook grew pretty organically. And, so, the market just--it wasn't force fed. And one of the things that I see that's really interesting in this ride-sharing market is, these companies are basically force-feeding the development of the labor ecosystem. And the thing that's sort of interesting about that is, I wonder to what extent that large amounts of capital that are raised have actually led them to distort the natural economics of that market. Because, they basically have been trying to lower costs for consumers, subsidizing that with venture capital. But then they end up, the driver is going to end up making enough money so they end up having to pay all kinds of incentives--

Russ Roberts: bonuses, yeah--

Tim O'Reilly: which--bonuses. And that's very costly. And I do wonder if they shouldn't be paying effectively efficiency wages: Pay more for the drivers so that they stick around; they don't have to spend as much money on recruitment; and don't spend quite so much money on, 'Well, we're just going to try to kill the taxicab companies by undercutting them on price.' And find a natural, you know, balance in that market. It's hard to say, though, because it's also true that the immense amounts of capital that they've spent are really spent on educating people about this new possibility.

Russ Roberts: Yeah. No, that's a good point.

Tim O'Reilly: And a lot of people who say that these companies can never be profitable really don't understand that, there will come a point--this is just the way you do it. And, this is the way transportation happens; and it becomes much more ubiquitous. Which is what they've been really pushing for. And at that point, it will be very interesting to understand to what extent the companies really find the right balance between the benefit to consumers and the benefit to the workers that they depend on. So, there's a real interesting--one of the books that influenced me a lot when I was writing my book was a book called Who Gets What--and Why by Alvin Roth.

Russ Roberts: Another EconTalk guest, by the way. [?]

Tim O'Reilly: Yeah. And I was introduced to that book by one of the economists at Uber, Jonathan Hall. And he said it was totally shaping--he was like, 'You've got to read this book. It's totally shaping my [?].' But it's really about this idea of, you know, you need to build a critical mass of buyers and sellers.

Russ Roberts: Yeah. It's about the challenge of matching. And a thicker market is easier than in a so-called thinner market.

Tim O'Reilly: Right. And so, it's really, it's so interesting, because, as I wrote this book I realized how much technology and the economy are becoming deeply, deeply, deeply intertwined.

20:38

Russ Roberts: With our culture. With our habits. With our--I mean, I recently had Benedict Evans on; we were talking about autonomous cars, electric cars. And I said something like, 'So when the autonomous car takes you to the grocery,' and he said, 'Do you think you'll go to the grocery?' and I thought, 'Well, actually, probably not.' So many cultural experiences, habits, as you point out--years, it might take decades to change the way we think about how to use these tools we have. It's going to change so many things about how we live, how we shop, how we interact with each other. I think, for example, the autonomous car is going to change a lot more than what we think of as taxis, obviously, or our own driving. It's going to change everything--just the way the car changed everything relative to the horse. You make a great point, by the way, in the book: when you talk about the labor model of Uber and Lyft, you say,

There are those who argue that Uber and Lyft are simply trying to avoid paying benefits by keeping their workers as independent contractors rather than as employees. It isn't that simple. Yes, it does save them money, but independent contractor status is also important to the scalability and flexibility of the model.

And then you go on to make the following point, which I think is fantastic:

Unlike taxis, which must be on the road full time to earn enough to cover the driver's daily rental fee, the Uber and Lyft model allows many more drivers to work part time and take passenger requests simultaneously from both services, leading to an ebb and flow of supply that more naturally matches demand. More drivers means better availability for customers, shorter wait times, and far better geographic coverage. These companies are able to provide 5-minute response time over a far larger geographical area than traditional taxi and limousine companies.

That's a great point. I've never seen it made before. And I just think, again, the creativity and the getting-used-to and the what's-going-on underneath this is just so hard to know. And you are worried about whether they pay enough, whether they should have lower turnover. My first thought is, 'Well, they'll figure that out. They have a pretty good incentive to.' They might not figure it out for a while. It may take 'em, their culture and CEO [Chief Executive Officer] and leadership and management may struggle with those issues. But I think they'll get the hang of it. And I think--as you say, I think it's the future, whether we like it or not. I like it. I think it's unbelievable. It's changed my life when I travel, in so many pleasant ways.

Tim O'Reilly: Yeah. So, one of the things that is super-important to remember or to understand is this great phrase from, that I learned, from these consultants back in 2000, called the beams[?]. And it was really--they were talking about business models as, the way that all of the parts of the business work together to create marketplace advantage and customer value. And, it's so often you see people who don't really understand how all of the parts of a business have to work together. And so, for example, taxi companies, they say, 'Well, we just have to have an app.' Thinking that the app that lets you summon cars is the magic. And that's one small part of the magic. Because, you do have to have that critical mass of drivers. If you are a taxi company and you basically say, 'Well, we have enough taxis, with our taxi licenses and this licensing regime, to meet average demand--because we can't have enough to meet peak demand, because they will be idle most of the time.' Right? So they can't do it, with their model.

Russ Roberts: They can't do it.

Tim O'Reilly: Because, that's the beauty of the model, is that you have more drivers when you need them and fewer when you don't. And so, the challenge, then, is, if you realize that that's actually fundamental to the ability to deliver, you realize a couple of things. One is the huge challenge that the transition to autonomous vehicles provides for companies like Uber and Lyft. A lot of shallow analysis says, 'Oh, well, those just get rid of all the cost of the drivers. Won't that be great?' And I say, 'Well, no. They're going to have to have enough cars to meet peak demand.' Right? So, logically, they are going to have--

Russ Roberts: Totally different. Yeah.

Tim O'Reilly: [?] A lot of the time, a lot less of the time, unless they find other uses for them. And, so you say, actually they are going to have to feather in humans and autonomous, and they are going to have to figure out how to balance which--do they take the best routes, or the worst routes? The worst times? the best times? There's all kinds of interesting challenges there. And, of course, probably the very best solution would be for Uber and Lyft to transition to a world like that of Airbnb, where other people provide the autonomous vehicles in the same way they do today. Because, that swarming marketplace model isn't backed[?]--the very center of their business model.

Russ Roberts: It's a great point. Again, I don't think Airbnb is going to move into their own hotel chains as a way to expand their business. They've got a good thing going. And that's the fact that we all have, many of us have unused capacity.

Tim O'Reilly: Right. And so, that's why I think what's going to happen--and, again, the logic of this says to me that in autonomous vehicles, these companies shouldn't be saying, 'Well, we're going to develop our own,' unless they feel like they can develop their own and then give it away--for example, Google said, 'Well, we're going to do Android and then we're going to give it to all the phone manufacturers so there's a Google-friendly phone operating system,' that they could say, 'We need to have an Uber- or Lyft-friendly autonomous vehicle system.

Russ Roberts: Yeah. Well, they could go that way. It's going to be--I think we'll both see this in--we'll find out, this, when it ends. It's going to be--probably, I hope--I'm 62--but I think I will.

26:48

Russ Roberts: I want to shift gears. I want to move to Amazon. You have a lot of interesting things to say about Amazon. You mentioned it earlier, about whether all this VC [Venture Capital] money, all this venture capital [?] poured into ride-sharing and before poured into Amazon--I always say, 'Well, this is great. I get cheap books, and I'm going to keep buying them. All these venture capitalists are paying.' And that really improved my life a lot. But I think--Amazon's interesting because--and you have some interesting observations on it. There's a temptation for most of us on the outside to see Amazon as just a big retailer that once sold books but now they sell lots of other things. But, you write the following about Jeff Bezos. You say,

How Jeff took the idea of Amazon as a platform out of the realm of software and into the realm of organizational design ought to be taught in every business school.

Explain what you mean by that.

Tim O'Reilly: Well, I think--there's a couple of things. First, the actual background. At some point, Jeff realized that Amazon needed to become a platform. I had actually given a talk about how Microsoft had beaten a whole series of challenges, from Lotus all the way up to Netscape, you know, in the PC market, because they were a platform provider and they owned the platform.

Russ Roberts: Explain what that means. Let's use Amazon as an example. What does it mean for Amazon to be a platform?

Tim O'Reilly: Well, literally, Amazon decided, at some point around 2003, 2004 they were going to take this big e-commerce application that they had built and they were going to turn it into a set of services that would be used to compose the application. Like, earlier, remember when I was talking about Uber and Lyft, I said, you know, they don't provide the payment. You know, you can get payment services from Stripe, or again--companies like that. You don't have to do it yourself. Well, Amazon basically said, 'We're going to decompose our own application and do a set of services.' So that when somebody wants to do computation, there will be a computation service. When they want to do storage, there will be a storage service. And then they basically turned the company inside out and said, 'We're going to offer these services to the outside world.' And, as a result, they built this Amazon Web Services business, which, you know, is now, a $10, $15 billion dollar business--you know, it's really established the whole new cloud computing market. And, really, it was because Jeff realized that if somebody else became the platform, that Amazon would be vulnerable in the same way that, you know, Lotus and WordPerfect and Netscape had been vulnerable to Microsoft, who owned not just applications like Microsoft Word and Excel and Internet Explorer, but also owned the underlying operating system. Then they could basically use that to make, to privilege their own applications. And so, you know, Amazon has not used [?] to privilege their own applications. But they did do this amazing thing, where they built themselves into a sort of a platform that they could then deliver their application with, which improved their own services. But they opened it up to the world. So, that's Part One. But, a second part that's behind that quote is that they realized, ultimately, that being an internet-scale platform requires a different kind of internal company organization. Because, you decompose your massive application into a bunch of small services. And those services are managed and created by small teams. Amazon calls them 'two-pizza teams'--you know, that is a team that is small enough to be fed by two pizzas. Right? And each team has some function that they are trying to optimize. And, it's--so effectively they've made an internal marketplace--almost managed by the invisible hand. I mean, obviously, there's a guiding spirit where we're trying to do this big thing. But, how people do the pieces, you know, is not really tightly specified.

Russ Roberts: I think a very good book could be written about how large corporations have tried to introduce market-like forces within their command-and-control regimes. It's a fascinating example, this one.

Tim O'Reilly: Yeah. Absolutely. Amazon has really done a great job of it. The thing that we have to really understand is that today's companies are infused with the digital. You know, when you look at a company like Amazon or Google or Facebook, it is the application. One of the earliest insights I had about Internet applications was that they still had people inside them. You know, this notion that, you know, unlike, a program like Microsoft Word, which is, as you quoted from me earlier, would ship every 2 or 3 years on a CD, an application like Google is constantly updated. Literally, it's a set of business processes where it just ain't--the activity of billions of people in real time, and then turning it into a unique work product, i.e., search, ads, whatever--Amazon in adjusting this huge workplace of products, continually updated, continually changing, you know, having people comment on the products that are featured are partly a result of what sells, what people like. You know, so lots and lots of people are giving a product 5 stars is going to appear at the top of the listings. And it's this dynamic, wonderful business process. And, it's not--you know, when people say, well using marketplaces inside of companies, this isn't like, you know, Accenture has done some really interesting work where they have built inside the company a jobs marketplace. You know, a little bit like Upwork for occasional--that's the small end of this. The big end is the entire company is infused with digital. It is an application. Amazon, all the people in it, you know, are part of Amazon not just the app that you see. And so in some sense, humans and machines are working together to deliver that service. It's all the way from, not just the programmers and the editors who are editing the content of the site, but also the people in the warehouses, the people and the delivery drivers. A [?] into this vast cybernetic, cyber organism.

33:48

Russ Roberts: Yeah. Well, you have a great quote. It's one of my favorite quotes in the book, and I think it's incredibly deep. You say,

If you think with the 20th century factory mindset, you might believe that the tens of thousands of software engineers in companies like Google, Amazon, and Facebook spend their days grinding out products just like their industrial forebears, only today they are producing software rather than physical goods. If instead you step back and view these companies with a 21st century mindset, you realize that a large part of what they do--delivering search results, news and information, social network status updates, relevant products for purchase, drivers on demand--is done by software programs and algorithms. These programs are workers; and the programmers who create them are their managers. Each day, these managers take in feedback about their workers' performance, as measured in real-time data from the marketplace. And if necessary, they give feedback to the workers in the form of minor tweaks and updates to the program or the algorithm.

End of quote. Standing that on its head it's just--that's a mind-blowing, beautiful way to think about it. And it emphasized--I forget, long ago, an EconTalk made this point that we're all just a giant focus group, constantly giving information to these products, and they are being tweaked and improved and changed. Of course, maybe not always improved for our benefit. I think mostly; but we'll maybe at the end talk about whether we should be worried about this. But, the process is a brand new phenomenon. It's an incredible phenomenon. And, as you point out a number of times in the book, and as you just said: It's hard to talk about where the human and where the technology start and end. They are just intertwined. They are augmenting each other.

Tim O'Reilly: Yeah. And you pick a key word here, which is 'augmenting.' When I think about the key--I started wrestling with this question of income inequality and how are we going to make a better word using technology, and it really struck me that the key design pattern of technology is augmentation. And I don't mean augmented reality, although that's going to be a pretty interesting set of new developments. But, just as the technology is the 18th, 19th, and 20th century were about augmenting our muscles, from the 20th into the 21st century we were really about augmenting our minds. And, you augment in a word to increase our capabilities. And that is the thing that--again, I kind of feel like I have this call to action which is at the heart of the book, which is: How do we use this technology? How do we get out of this narrow idea that the only function of technology is to productivity in the narrowest sense simply by doing the same thing more cheaply? I talked with one investor who said, 'I invested in a startup, an AI [artificial intelligence] startup that will get rid of 30% of call center jobs.' And I said, 'And I talked with Abby Johnson of Fidelity and she wants to make her call centers work better.' She doesn't want to get rid of the workers. She wants to avoid the situation I was in where I was trying to transfer one of my wife's accounts and I spent two hours on the phone. And still didn't get the right information.

Russ Roberts: Yeah.

Tim O'Reilly: You know, it's like make it better.

Russ Roberts: Well, I think the best entrepreneurs do that, obviously, and the best investors understand that if you eliminate 30% and give worse customer service you are not going to be a very effective innovation.

Tim O'Reilly: Right.

37:47

Russ Roberts: I want to come, in the last part of our conversation, I want to talk about these issues of sharing these gains more widely and what's going to happen to the jobs of the future. But, I want to add, before we leave Amazon, first I want to apologize to listeners but these are so interesting--I want to read one more little story about Amazon and then I want to ask you a question. Quote:

In an Amazon management off site, Jeff Bezos once famously responded to a suggestion the company needed to improve communication between teams. "No. Communication is terrible," he said. The reason can be explained by the old joke. One person sits and drinks. Two person clink and drink. The more people you add, the higher the ratio of clinking to drinking. What you want, said Bezos, is a situation where people clink only with the people doing shared work, not with everyone they touch. This is simple math. Communication gets worse as team size grows.

That last part may have been you, not Bezos. But that's the point. And it just--

Tim O'Reilly: Yeah. Just to be clear: The only part of that that's a quote from Jeff is, "No. Communication is terrible." The joke and the rest is me explaining the point.

Russ Roberts: That's just so great though. This is crazy, but it reminds me of the insight we've talked about here before on the program of FedEx realizing that if you go to a hub, you need a lot fewer planes than if you have direct flights between every place you are going to deliver and pick up packages, because you are going to need a lot more planes. It's the same clinking and drinking problem. Ironically or not.

Tim O'Reilly: Yeah. Although, there's a couple of interesting counterpoints to that, and one is in airlines, the hub and spokes system versus Southwest, which did do point-to-point, continues to do point-to-point, and actually for a long time was the only profitable airline.

Russ Roberts: Yep. Good point.

Tim O'Reilly: And the second thing is that I think is--because again, they realized that serving an unserved market was a market opportunity rather than just serving the major markets more cheaply.

Russ Roberts: Yup. True.

Tim O'Reilly: But, there's another piece, which I've been chewing on, and it really has to do with: How does this new economy end up creating more jobs? And there was a great example I came across recently in Alexis Madrigal's wonderful "Containers" podcast. He has an 8-part series about container shipping. And, Episode 4, he talks about the changing economics of coffee: because container shipping led to this world in which you could take massive, bulk products, load them into a container, ship it halfway across the world at very low cost. You got rid of all of the loading and unloading--the longshoreman jobs. Huge job losses that happened in the 1970s and 1980s. And now, the jobs are coming back. Guess what? Because we've gone beyond commodity coffee back into this differentiated marketplace where people say, 'This is single-origin coffee from this particular region--Guatemala, or Honduras, or Sri Lanka. And it's roasted by this particular roaster in Emeryville, California.' And so, what happens is: container comes into the port; but then all the containers have to go to this new distribution center, where they get unloaded, because, you know, Blue Mountain Coffee is getting a certain amount of coffee from 15 or 20 different individual growers somewhere else around the world. So, you've ended up re-putting labor back into the process, because we have also added into coffee the idea and the experience--the aesthetics--of uniqueness. And that's one of the themes that runs through the book--is this wonderful idea that Clayton Christensen put out in 2004 as the 'law of conservation of attractive profits'. And I saw it in the software industry--and I won't go into where I saw that there. But I see that as the key to the next economy. Because, as one thing becomes a commodity, something else becomes valuable. So, coffee was commoditized all the way down to those 5-pound cans; and then the second wave of coffee was, 'Well, we're going to differentiate, and we're going to have better coffee and unique roasts.' And we saw the rise in people like Starbucks. And now you see all these specialty coffees, that people pay more for. And people more--sure, food is this massive coffee and people pay for the admixture of human aesthetics. And even in a world of robotics and AI, I think that can be the key to a future economy of prosperity. Because it's ultimately about us sharing stuff with each other, and persuading each other that the stuff we share is worth having.

Russ Roberts: Yeah. That's really nice.

42:46

Russ Roberts: Before we leave Amazon, I want you to teach me something, which I got a glimpse of in the book, which I think most of us don't have any idea about. So, you talked about how their cloud service, AWS, Amazon Web Services, or Servers--what's?

Tim O'Reilly: Services.

Russ Roberts: Services--how that initiated the cloud revolution. Well, for me, naively, until I read your book, I always thought: 'Well, I'm into the cloud. I use Dropbox to save my photographs, and I keep documents there; and it's nice to have a backup, and that's really great.' And I have no idea where those servers are that are storing all that stuff. I assume they are out in someplace remote with a lot of air conditioning keeping them cool. And, you point out that that's not what--I mean, Amazon makes Netflix possible. I didn't realize that. So, talk about that. And then, finally, if you can remember, talk about whether Amazon is going to be profitable in its current form, because the recent numbers I saw--they are making a lot of money, but it's all from AWS. They are just kind of limping along, barely breaking even on this unbelievably large retail presence.

Tim O'Reilly: Yeah. Well, a couple of things. Like, Amazon has built, has continued to invest in the future. Yes, they did become the AWS company in some ways, that has become the most profitable part of their business. Retail in general is not that profitable. Right? So, I don't think that saying that Amazon--

Russ Roberts: They can't make it up on volume, if you are losing money. So, they are trying to do that, it looks like.

Tim O'Reilly: No, I don't think so. I mean, I think, you know, they are basically--they are holding it together pretty well. But, let me come back to your question about AWS. Yes, actually Dropbox was originally built on top of Amazon Web Services. Netflix uses Amazon Web Services to deliver its service. So, again, this is this Internet operating system I've been talking about for the last 20 years, you know. Just like the PC [Personal Computer, non-Mac-type] had this platform of Windows, AWS really became the platform which tens of thousands of startups built their services. And, of course, there's now competing clouds--Google Cloud, Microsoft d'jour. And you can, if you are a big enough company you can do it yourself. But you don't have to. I think, for example, Dropbox has now internalized their own storage platform, because they are big enough to do that. But, the enabling technologies, the platform technologies, are key to the advances of civilization. You know, when you think about an economy in general--roads were a platform technology. Electricity is a platform technology. Running water is a platform technology, and garbage collection is a platform technology. We even use the term 'garbage collection' in computer programming: it's part of what operating systems do. They get rid of all the--you know, stuff that gets left around by badly-performing programs. And so, anyway, Amazon has built this amazing business layer there, created this new market. But I think that they continue--their growth in retail, I think is still actually incredibly powerful part of who they are as a business. I wouldn't think of them as, 'Well, they are really just the AWS company.'

46:32

Russ Roberts: Let's talk about the future, and the worries that a lot of people have. You give some examples in the book, more than one, of how--you just gave another--of how employment often expands unexpectedly. That is the history of humanity--literally. As you point out, I think, very early in the book, the work doesn't disappear. The jobs do, but the people don't die. They go off and they can do the new work that's still out there. There's new things to do, when technology and tools advance. That's been the history of humanity. But some people worry--not unreasonably--that maybe it's different. Maybe this is--it's one thing to augment muscles with machinery, but augmenting brains with artificial intelligence may limit what many people can do productively to serve each other. Which is what a good economy does. So, one of the things, obviously, is education to help us make that work better. So, I'd like to hear what your thoughts are on education; and just in general, what do you think needs to be done that won't take care of itself? I tend to believe in the power of things taking care of themselves. But, this may be different. We'll find out. But, what are your thoughts on what we can do explicitly and directly to try to help people cope with these changes?

Tim O'Reilly: Well, first off, education is, has always been central to progress. And, a wonderful quote from Robert Putnam, author of Bowling Alone and many other books--but, I was in this Markle, sort of multi-year process called Rework America, and Bob Putnam said, "All of the advances in our civilization have come when we invested in other people's children." And he kind of went through--you know, universal grade school education, universal high school education, you know, the GI Bill [Servicemen's Readjustment Act of 1944; GI = Government Issue--Econlib Ed.]--and each of them led to actually a more productivity economy. So, education is a huge lever for making the world a better place. And the problem we have is that we have a sclerotic education system, where we are still, despite all the changes, thinking first of all that you get done with it, whereas in fact you have to keep--continuous education is the world of the future. The kinds of things that you have to teach are very, very different, and they change very, very slowly; and because of course we now have all these cognitive enhancements. And we are still effectively teaching people--you know, there's this analogy--we're doing the equivalent of teaching people how to drive a plow, push a plow, in a lot of the things we teach. Because the skills that are really needed today are very different when computers can remember things for us very easily, when they can do math, arithmetic, for us very easily, can approach subjects very differently. And we need to approach them through a task orientation. So, for example, you know, a very useful course would be: How do you survey the media landscape and figure out what's true and what's not? That would be far more useful than many of the things that are taught in grade school. I just read a wonderful account of a teacher who is doing that. So, there's that kind of thing. But also just this idea of continuous education, on-demand education. We're going to get to a point that's not that dissimilar, that fanciful scene in The Matrix where Trinity says, 'I need to know how to fly a helicopter,' and it downloads into her brain. I watch my teenage stepdaughter figure out how to do things. She goes and looks it up on YouTube, and--done. She's figured out how to make something or do something that she didn't know before.

Russ Roberts: Right. Our kids do that effortlessly.

Tim O'Reilly: They know that on-demand learning is the way that you learn. And so, the question is: How do we teach kids and give them access to the right kinds of skills and the right kind of knowledge of what's available out there.

Russ Roberts: A lot of that comes naturally to them, like the example you just gave. I was going to say, our kids do that effortlessly. I do it when I'm up against a stone wall. I couldn't get my toilet seat off: I'm changing out a toilet seat, and I thought, 'Oh, I'll just look it up on YouTube.' And, of course, there were 10 good ideas I hadn't thought of for how to get my toilet seat off. And my dad, he just--he's 87--he just calls me and says, 'Do you know such-and-such?' And I'll say, 'Well, I don't, but you could look it up on Google.' And sometimes I wonder--I like to think he just likes to call me. But, it could be he didn't think of Google. Because he does say--it seems to be actual surprise--oh, yeah, he didn't think of that. There is a real challenge for the idea of what we're going to do with formal education, what do we need and what should be taking place in it; and our current system is remarkably unflexible in trying to help us figure out what that might end up looking like. It's, I think, a real problem.

Tim O'Reilly: Yeah. It's sort of interesting, because, if you actually think about how education would best happen, I think we could get away from the regimented schooling entirely. It's sort of interesting, because I have a large Catholic family, many of whom, the next generation, were home-schooled. And, there's this community, you know, of--my brothers and sisters live close together; they have lots of other friends with large families. And, they home school. Because, my sister says, 'I'll teach biology,' and somebody says, 'I'll teach math,' and somebody else says, 'I'll teach English.' They have enough kids in the neighborhood that they put on a Shakespeare play every summer. Actually, two, sometimes, in a summer, with making the sets, learning the lines, doing--making the costumes. And they actually spent--my observation was that they spent less time educating their kids than I spent with my kids on homework. And the kids came out fine. They ended up going to college, getting good jobs. And so, there's a whole question of: We assume that the way we've been doing it is the only way to do it.

Russ Roberts: Yeah. It's not a good idea.

Tim O'Reilly: And, here's this thing that's so interesting: is that, there's so many areas where, if we gave people a different mental model of how to do things and we figured out market mechanisms so people could get paid, or it might be that the market fails, and we need a different way of funding it--because, of course, we fund education publicly. We don't make everybody do it themselves--

Russ Roberts: Slightly expensive to both, K-16.

Tim O'Reilly: Yeah. What would happen if we just blew that up and said we are going to do it very, very differently? Or figured out: Where are the experiments that we could support?

Russ Roberts: I have four kids; three of them are either out of college or in college. The fourth is a senior in high school. And a part of me wants them not to go to college. But, it's really hard to--it feels risky. It is risky, obviously.

Tim O'Reilly: Well, when I think about my own life--I went to Harvard and I got a degree in classics; and it's certainly been a wonderful gift to me to have done that. But, everything in my professional life, I learned after college--by doing it. And that's part of what my own business is really about--creating learning resources for people who teach themselves the things they need to know. We publish books. We run conferences. We have an online learning platform called Safari [Safaribooksonline.com], which is, tens of thousands of e-books, training videos, live online training. Because, basically we realized that in our, my universe of computer, people have to learn new skills all the time.

Russ Roberts: All the time. Yeah.

54:49

Russ Roberts: Let me ask you a different question about the future, which is on people's minds. The economics version of this--people are worried about profit margins. They seem large. I'm not sure that's the case. But, they seem large. And one way you get larger profit margins is monopoly, or less-competitive force from your neighbors, your competitors. We are in a world right now where--at least right now, there seems to be one really good search engine. There's a couple of places you can get a driver--call a car on demand--Uber and Lyft; there are few others, also, Via, I know of. But that might end up being one. And we're talking about the fact that they are investing large amounts of money to get that thick market going. And so there might be one survivor of that. There's one really big social media place called Facebook; there's a lot of smaller ones, Instagram and Twitter, too. But Facebook is increasingly becoming where people--or had become; now, obviously, it's in question. But there is some worry that these very large companies are going to have an inordinate amount of power over us. Recently it was in the news, a think tank that's funded by Google did some things that maybe made Google happy that don't look so good. And then we have the Google memo, James Damore[?], whether that was a good thing or a bad thing. Part of me says: it's a private company; they can do whatever they want; none of my business, even. Part of me says: they are really getting kind of hard to say no to. My usual answer to this is: If you don't like 'em, don't use 'em. Use DuckDuckGo. Use a different email service. There are many--there are still alternatives. But, are these companies too powerful? Is it something you are worried about?

Tim O'Reilly: So, I have a somewhat different view. First off, I believe that many of these digital platforms do have a tendency towards natural monopoly--this, network effects that make it just simply better for everybody to be using the same one. Now, the question ultimately may be: Should they be regulated monopolies or not? But, more urgently, my advice to them, is: Make sure that it works for your marketplace. And, you know, if you think about these things as marketplaces, not just--right now, too often I think these companies think, 'Well, we have customers.' But they don't also think, 'Well, we also have suppliers.' You know, because all of the people who are creating content on the Internet, for example are Google suppliers, as well as their customers. And if you realize that it's a marketplace that you have to make work for both sides, then you kind of invest in that ecosystem. And instead what I see is this pattern that, you know, Microsoft sort of--IBM [International Business Machines] showed first in the computer industry and then Microsoft--which is, as they became more powerful they tried to take more and more of the market for themselves. Not realizing that's a short-sighted behavior. Because, if people can't make a living in your marketplace, they go somewhere else. And so, you know, there's a self-interest. So, Walt Mossberg once said to me--and I can't believe I didn't put this quote in the book. He said--he was recounting a conversation he had had with Steve Ballmer when he was CEO of Microsoft. And he said, 'Steve, if you guys would just dial back the greed only 5%.' You know, 'people would like you 100% more.' And I think that Google is right at that point--where the market is going to turn on them. And I think that the myth that it's good enough--if you are helping customers, that's all you have to worry about, is part of it. But an even more pernicious myth, I think, in our economy, is that if it's good for shareholders then you don't have to worry about all the rest of it. Because, in fact, you really do have to look at an economy as an ecosystem. And, when you have a monoculture where, you know, one company becomes too powerful, and they forget that when they are that ubiquitous they actually have to be an enabler for everybody else, as opposed to simply--you are no longer just a player in the market trying to get as much as you can. You are the market. And so, therefore you have to actually keep a level playing field. You have to make opportunity for others. And you can't take it all. You know: that's critical. And, for me, the biggest offender in that list is not Google or Facebook or Amazon. It's our financial markets. You know. We are literally--I remember there was this--I forget who made the statement, it was somebody at JP Morgan, you know, after the American Airlines was going to give a raise to their employees, and it was like, 'They can't do that.' You know, it was like, 'They are robbing the shareholders.' And I was like, 'You've got to be kidding.' You know, the amount of the productivity gains that have gone to, you know, Wall Street, the corporate shareholders, and not to, you know, the people who were working in all these companies as a result of this sort of idea that somehow--you know, I refer, in the book, I said, 'You know, we laugh at the idea that the idea that the Kings had this divine right to own things." And now we have this divine right of capital. And we are going to look back on that and go, 'No.' An economy should be for everyone. And when you have one particular group that says, 'I'm going to take it all for myself,' and that it eventually falls down. You have a revolution. You have social unrest. And it's sort of short-sighted behavior. And so, we actually have to actually understand that great companies, you know, that become platforms for the rest of society, have a responsibility for those that depend on them.

1:01:14

Russ Roberts: Yeah. The problem is--and you are opening remark on this topic illustrates it. It's evidently hard to do. You mention IBM, then Microsoft. I think Google's next. Where, it just--doesn't come: Here's the problem: When you don't have competitors, it's very hard to keep focused on doing a very good job. And you get a little more focused on getting bigger.

Tim O'Reilly: Yeah. Well, yes and no. But you do have competitors. You just don't see them.

Russ Roberts: You just don't see 'em. Correct.

Tim O'Reilly: Part of the reason why it's so important to take the long view. Microsoft did have a set of competitors. They were all of the people who they had disenfranchised. And, believe me: If Google ends up disenfranchising too many people, they are going to breed the next generation of competitors.

Russ Roberts: My guest today has been Tim O'Reilly. Tim, thanks for being part of EconTalk.

Tim O'Reilly: Love it. You are such a great interviewer. Thank you very much.

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What a Wonderful Worldtag:www.econtalk.org,2017://2.153562017-10-04T20:23:17Z2017-10-04T20:42:33Z EconTalk host Russ Roberts took a deep, different, and quite personal turn in this week's episode, in which he welcomed Robert Wright to discuss his newest book, Why Buddhism is True. Roberts admits to being a regular practitioner of...Amy Willishttp://www.econlib.org EconTalk host Russ Roberts took a deep, different, and quite personal turn in this week's episode, in which he welcomed Robert Wright to discuss his newest book, Why Buddhism is True. Roberts admits to being a regular practitioner of mediation, though having begun the practice with his usual skeptical bent.

Since this week's episode was so different, we thought we'd try a slightly different tack here as well. Rather than reflect on specific topics from the conversation, this week we're more interested in your own experiences with mindfulness and meditation. What does mindfulness mean to you, and how do you strive for it? Is it just a catch-phrase for the self-help section of your local bookshop, or are there real and lasting benefits for individuals? For communities?

1. Do you meditate on a regular basis? If so, how long have you been practicing? Why did you start? What challenges have you faced, and what benefits have you reaped from the practice?

2. For those of you who don't meditate, has this week's conversation prompted you to consider it? Why or why not? Are you skeptical about the benefits both Wright and Roberts attribute to the practice, and again, why?

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3. If you're a regular practitioner of meditation (or any other practice for mindfulness), can you suggest some of your favorite references and/or techniques?

4. Do you believe suffering is an inherent part of the human condition? Why?

5. Why is (or has?) wonder become so devalued in society today? What efforts might we make to bring more wonder to our own lives? What has struck you as wonderful recently?

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Robert Wright on Meditation, Mindfulness, and Why Buddhism is Truetag:www.econtalk.org,2017://2.153412017-09-30T10:00:16Z2017-10-06T08:47:17Z Robert Wright, author of Why Buddhism Is True, talks with EconTalk host Russ Roberts about the psychotherapeutic insights of Buddhism and the benefits of meditation and mindfulness. Wright argues our evolutionary past has endowed us with a mind that...Russell Robertshttp://www.econtalk.orgRobert Wright, author of Why Buddhism Is True, talks with EconTalk host Russ Roberts about the psychotherapeutic insights of Buddhism and the benefits of meditation and mindfulness. Wright argues our evolutionary past has endowed us with a mind that can be ill-suited to the stress of the present. He argues that meditation and the non-religious aspects of Buddhism can reduce suffering and are consistent with recent psychological research.

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0:33

Intro. [Recording date: September 18, 2017.]

Russ Roberts: Robert Wright's latest book, Why Buddhism Is True, argues that Buddhism and the practice of meditation is consistent with evolutionary biology and much of what we've learned from the latest research in psychology. And that's our topic for today.... Now, despite the title, Why Buddhism Is True, this is not really a religious book. It reminds me a little bit about a story I've heard attributed to Enrico Fermi; but it's probably been attributed to other scientists as well. Supposedly a student comes into Fermi's office, and as he's leaving he notices there's a horseshoe over Fermi's door. And the student turns back to Professor Fermi and says, 'Professor Fermi, you don't really believe that, do you?' And Fermi says, 'Of course not. But they say it works even if you don't believe it.' And, your claim, your book reminds me a little bit of that story. Your claim is that meditation and the Buddhist approach to mindfulness works even if you don't have a religious belief in Buddhism, say. So, let's start with what you mean by meditation, and what you mean by mindfulness, for people who aren't, who haven't heard of these topics and how they are applied in your book.

Robert Wright: Yeah. Well, first of all, you are right: the book isn't about the kind of most plainly religious parts of Buddhism. In other words, the parts that are often considered supernatural like reincarnation. I do focus on claims you can evaluate from the standpoint of modern psychology and philosophy. And as for meditation: there are a lot of kinds. I mean, there are Buddhist kinds and non-Buddhist kinds and even within Buddhism there are a number of kinds. There is Zen meditation, and sometimes that involves contemplating these koans, you--these cryptic or paradoxical sayings or questions. Tibetan meditation often involves visualization, sometimes elaborate visualizations. Mindfulness--the kind I focus on mainly in the book, is about--it's kind of an exercise in attention, you could say. It's about calming your mind enough, typically by focusing on your breathing a while, but calming your mind enough so that you can observe things with more care and clarity than usual. A lot of those things are inside your head. They don't have to be. You can focus on sounds mindfully. But a lot of the things you focus on are inside your head, like feelings. And, with feelings, you basically, you employ, I guess what you could call a basic objectivity of perspective that is unusual. I mean, usually what we do with feelings is react to them. Typically without thinking about them very much or observing them very closely. But, with mindfulness, you might take something like anxiety that you normally kind of react to and try to get away from; and you just kind of accept it, live with it; and thereby allow yourself to actually examine it. That can lead to a kind of loosening of its kind of grip on you. And this is, probably the most famous use of mindfulness is in this kind of therapeutic way you view feelings, as they sometimes say, nonjudgmentally. And this loosens the grip, particularly of unpleasant feelings that you'd like to see the grip of loosened. But, I would say that mindfulness meditation in principle goes a lot deeper than that and has a deep connection to some of the most radical, philosophical claims, made in Buddhism. And in the book I kind of start out with the therapeutic stuff, and, and, and as the book progresses, I move toward the deeper stuff, I guess you would say.

Russ Roberts: Yeah. You break the reader in gently.

4:39

Russ Roberts: I want to start with the therapeutic side, though, because I think for someone who has never meditated or attended a silent meditation retreat--and I've done both; and in advance of that experience--in advance of attending a silent meditation retreat I'd never meditated. And I went in with a great deal of skepticism. And I would imagine that listeners who have not meditated or attended a retreat like this, would have an incredible amount of skepticism about it. And so, I think it's worthwhile to talk a little a bit about this claim--I would say it's more about emotions than feelings. Of course, they can mean the same thing. But that various emotions that arise in us can be controlled in a way they otherwise can't be through the process of meditation. That seems like an absurd claim. Right? So, if I said to you--and some people say this; I don't agree with it but it's a common claim, 'Oh, you just listen; watch your breath for 20 minutes a day and try to clear your head and pay attention to your breath; and you'll become a happier person.' And that's--again, for a non-, a person who hasn't meditated, that sounds ludicrous. And for someone who has, I don't think that's quite enough. So, try to flesh out the claim to make it a little more plausible for people who have not experienced it.

Robert Wright: Right. Well, first of all, like you, I had never--I actually had tried to meditate before my first meditation retreat. I just never succeeded. So, a silent retreat was what convinced me that there was something there. I think a lot of people who are more natural meditators than I am might not have to go to a retreat to become convinced of the power of the technique. But, you are right that a lot of times people say, 'Just focus on your breath.' I think that can calm people. I think that can be a good thing in itself. But with true mindfulness meditation, you are going deeper than that. And that is really a preparatory phase. The calming of the mind is just preparation to view things more carefully. And just to give people a sense of the potential power of mindfulness. I remember, after, a few weeks after my first meditation retreat, I was doing this crazy thing I do sometimes, which is: I had a big talk the next day. And so I woke up in the middle of the night and I started thinking, 'Wait a second. What if I can't get to sleep? Then I'll do a terrible job of a talk.' And of course, this is completely irrational to respond by the news that you need to sleep by failing to get to sleep. But that's the way anxiety can work. And so, I thought, 'Well, I'll set up'--do what you are supposed to do with mindfulness: Set up, not run away from the feeling, not just observe it, be with it. And, in a few minutes, I got to a point where the anxiety in my abdomen--and meditation makes you more aware of where in your body feelings are, for starters. But I started, it just, suddenly I was viewing it the way I would view a piece of abstract art in a museum. It was interesting. I wasn't particularly attracted or repelled by it. It was neither good nor bad. It was just kind of interesting. I was examining its contours. It had completely lost its grip on me. And shortly after that, it dissolved. Now, I'm not going to claim that an experience quite that dramatically therapeutic is trivially easy to attain, by any means. I mean, this was like right after meditation retreat when you are kind of in the zone. But, some measure of that I think is accessible to people with a relatively modest commitment. And a meditative commitment. You know, maybe 20 minutes in the morning or something. And I believe it is a step toward actual clarity. And this is, I mean, I don't want to go--tell me if I'm going too fast. But, I think one of the fascinating things about Buddhism is the claim that, the reason we suffer is because we don't see the world clearly. Which is also, they say in Buddhism, the reason we make other people suffer, the reason we kind of misbehave. And so by clarifying your view of the world you can become a happier and better person. That's an amazing claim. And I think, looking at your feelings in a sense more objectively is an example of a way that that can work. But I just do want to emphasize--it's kind of an analytical exercise. I mean, I emphasize this for your listeners, in particular. I view--I mean, there's an old saying--I mention these different kinds of meditation, that, you know: Zen is for poets; Tibetan meditation is for artists. The postena[postenant? sp?], which is a kind of meditation closely associated with mindfulness, is for psychologists. And it is, it is in some respects an analysis of your own mind.

9:46

Russ Roberts: Yes. I want to get your thoughts on where that power comes from that you alluded to in that night before your speech. I've had a number of moments like that, as well. And of course, we could be fooling ourselves--which is always interesting. But let's assume we're not fooling ourselves about the control that we might have. What I found extraordinary is that things that used to create anger in me, impatience, annoyance, and various other emotions: By observing them and watching them and somewhat dispassionately arise in myself, I've been able to--as you say, they lose some of their power over us. And it's interesting: there's a strong tradition of meditation in Judaism: makes the same, mystical thinkers in Judaism made the same claim, that by letting your demons in rather than running from them--which is our standard, one standard method we have about our demons. The second method is to fight them. Which some would argue just seems to make it worse. And the third method is to just let them in. And that's part of who you are: You can't avoid it; you have lots of flaws and character traits that influence you. And by observing their influence rather than just being influenced in the heat of the moment, you can have some serenity. And also--this is the more important point, to me, you can decide what to do rather than having your anger decide what you do. And I think that's, to me, the biggest payoff. So, the challenge I want to raise, though, is I wonder, in your experience, how much of that controls [?]--and of course you don't have it all the time. It's not--I don't need to suggest I'm now this masterful, self-controlled person. But I feel like I have more control. I feel like I'm a better husband, a better father, as a result--friend. How much of that do you think comes from, in your case it sounds like 30 minutes or more a day, of just sitting and observing the breath or being aware of your thoughts? Versus the intensity--which is very daunting for most people of a 5-day or a weeklong, or a 2-week meditation retreat where you are forced to confront yourself? And I found that very powerful. So I'm curious what your thoughts are on that.

Robert Wright: Well, retreats are important to me. And this I say especially about my first retreat. Because, for one thing, they allow you to see what is possible in principle. Right? By the end of my first retreat, I felt radically transformed. I was seeing beauty in places I had never seen it before. I was much less judgmental of people. I remember at the beginning of this retreat, you know, I was like sizing up the other retreatants. And, since you are not going to talk to you them, you know, you might as well use entirely superficial grounds, which, you know, let's face it, we're inclined to do anyways. And I remember seeing this guy wearing a t-shirt that said 'Juilliard' on it, and thinking, 'Oh, well aren't we special.'

Russ Roberts: Yep.

Robert Wright: And, at the end of the retreat: yeah, it's, this is what we do, right? And the guy--at least I do. I never know whether I'm worse than average--

Russ Roberts: [?] You're the only one, Bob.

Robert Wright: Really. This has been a very unfortunate experience for me. I have been under the illusion that I was not uniquely bad. But--and then at the end of the retreat, the silence is broken; we can ask questions. And this guy stands up--he's the most timid, insecure soul you can imagine. He's virtually quivering as he answers questions, of course I totally misgauged him. And then when I called my wife at the end of the retreat, she says that before I'd said anything about the retreat, just by the tone of my voice she was delighted about the new Bob. Now, as you know, this doesn't last forever. You know, unfortunately, life is not an endless meditation retreat. Reality intrudes. And you kind of wind of hanging on to what you--as much as you can, of the mindset you had at the end of the retreat via some kind of daily practice. If you maintain that discipline. And that's what we're doing I think, for sure. But, the retreat shows you what is in principle possible. And in my case at least helped convince me, along with other things--along with considerations along with evolutionary psychology and so on--but it helped convince me that this actually is a clear view of the world. The one I had at the retreat--was a clear--because after I, I didn't know anything about that guy with a Julliard t-shirt. It was a delusion to think that I had enough information to judge him. Right? It was kind of an emotionally-driven illusion, in some sense. And I think--so, retreats helped convince me of the potential and in a certain sense validity of the practice in being a way to clarify your vision. And then they also serve as periodic reinforcers. I try to do a retreat close to once a year. Because, as time wears on it's easy to start getting lazy about your practice, on any given morning, even though you are convinced at some level that your day will go better if you practice, you may feel you don't have the time or whatever. And so I like retreats as a little booster. And I guess those are the two main functions I see them serving.

15:11

Russ Roberts: I want to talk a little bit about the judgmental comment you made. A big theme in the reading I've done and the meditation I've done is to try to reduce my judgmental aspects toward myself and towards others. Which is very--that really goes against my grain. I've spent a lot of my life being judgmental towards myself--and of others. And felt virtuous about it, of course, which makes it even more difficult to think about that it might not be a good idea. But, one argument against that being less judgmental is that it tends to make us more wishy-washy, a little more, maybe too tolerant of things that are not good. And also, there's a passivity in some of the mindfulness literature that, 'Just be in the present; just enjoy life right now, because that's all there is,' is a standard claim. And of course that's not really all there is. There's the past, which haunts us. And maybe should. There's the future, which we want to enjoy and need to plan for. And so, comment on that, those sort of critiques of the Buddhist approach of not being judgmental and being relatively

Robert Wright: Yeah. Well, first of all it's interesting that actually, if you go back and look at the seminal text that is centuries old on mindfulness--the Satipatthana Sutta--there's actually no mention of living in the moment. There's no phrase that can be translated as 'the moment' or 'the present'. And, you know, to some extent, the meditation that is being taught in the West is being adapted to its current context, in which staying in the moment is sort of challenging because of the technological environment and so on. That said, I don't think it's an invalid emphasis. If you do all the things that is says to do in that ancient sutra, you will be in the moment, because it's asking you to systematically observe things: your feelings, your thoughts, your perceptions, sounds, and so on. And so you will be in the moment. Now, as for the judgment question, that's another thing that's actually not explicit in the texts. But again, I think it's true to the spirit of Buddhism to say that you are viewing your feelings without judgment. And, the question you raise is a common one. In other words, if in a way the goal of Buddhism broadly speaking were able, is to allow you to sustain wellbeing even in adverse circumstances --which is one thing it is about, is there not a danger that you'll become content with any circumstances whatsoever? And not judge certain things as bad things you want to change. You hear this from social activists, for example, this concern, like, 'Will I lose my passion for social justice?' My feeling about that is that it's a very good theoretical question and not a very urgent practice question. In other words, I can imagine you going so far down the path that you would sit around meditating pretty much all the time and be a pretty contented person. Or, even if you weren't meditating all the time, you know, go through life so content, so non-judgmental that you were not a particularly positive force in the world, even though I would say at a minimum you were at least no longer part of the problem. And that's something, right?

Russ Roberts: Yeah.

Robert Wright: Because if you really followed the Buddhist path you will have relinquished the obviously selfish impulses and the subtly selfish cognitive biases that lead us to misbehave. So, in a way it's not a net loss, if you really get close to so-called enlightenment or whatever. But I think for almost everyone that question just doesn't arise. Speaking for myself, I do care a lot about issues of policy and various ethical issues; and I think for me it has been a challenge to not let the intensity of my concern get in the way of actually wisely advancing the causes I'm interested in. And I think honestly that's the position of 99% of the people who raise these questions: is, you know, it would be a good problem to have, if you attained such equanimity that you were no longer trying to do the things that you feel need doing right now. I just don't think that problem arises very often.

Russ Roberts: Yeah. For me, the--I just find it fascinating. I've read a lot of books on the present moment in various formats--it's not literally--some are literally called something close to that. But, they don't--I don't find them very helpful or interesting. What I do find helpful or interesting is the idea that when I'm talking to someone, I'm giving them my full attention. Which is not easy to do. And meditation has helped me to do that rather than, at a party, looking around and thinking, 'Who else can I talk to? Who is more interesting?'

Robert Wright: Right. Right.

Russ Roberts: And I think that's a terrible thing to be doing that; and I'm really glad I do a little bit less of it. And the other thing is, it does help you appreciate as you pointed out earlier and in a number of places in the book, moments of natural beauty, human compassion, poignance in the world that you missed because you weren't paying attention--that you just didn't--and they are simple things like a flock of birds overhead. It's the leaves changing on the trees. It does give you an opportunity to savor life I think a little more vividly if it's used correctly.

Robert Wright: It really does. And it's not entirely clear to me why it does. In other words, I might think that the case would be what people often assume it is, which is if you are looking at your feelings in a more objective way, there is some kind of like dulling of feelings in the aggregate, or something. But that's not really what happened. I mean, it's true that some of the less fortunate feelings and some of the most distorting feelings can lessen an impact. But, you know, in other realms--I mean, you take more delight in aesthetic experiences of various kinds. I remember my first meditation retreat, I noticed that some people were eating with their eyes closed, and I'm like, 'What's up with this?' And then I realized: they are so immersed in the flavor--

Russ Roberts: so intense, yeah--

Robert Wright: and they just want to make it--yeah, it's incredibly intense. And it's not even the kind of food I would normally think I would like. It was very healthy food. And it was just amazing. I had an experience in my first retreat where I was taking a walk in the woods and I saw a weed, called a plantain weed, a kind I--I had spent a lot of time trying to kill this weed, because it had infested my lawns. And suddenly I looked at and I felt like, 'Why have I been trying to kill this weed?' I mean, viewed in a sense dispassionately, it's just as beautiful as all the other plants in the forest. And, by the way, I don't want to get into Buddhist arcana. I mean, I do toward the end of the book; and in fact I use this very example. But, I actually think that's an example, what I was experiencing was an example of what is called, kind of misleadingly, the 'apprehension of emptiness' in Buddhism. I think what that really means is, you no longer impose the kind of sense of essence on things. Right? So, I wasn't feeling essence of 'weed'. That there was a subtle way that feelings had been shaping my perception of a weed that I hadn't really understood. And this was like a deep, a subtle and yet deep perceptual shift. And I think a lot of times the perception of essence gets in the way. Especially when we impose kind of negative essences on certain humans without sufficient evidence, and so on. But, the point you are making is right and very important: That, although on the one hand kind of the Hallmark Card version of mindfulness, live in the moment, is a). not true to the original text, and because). doesn't really get at the deepest part of this, it still it is a very welcome side-effect of mindfulness meditation to appreciate, look, the person you are talking to at the cocktail party who you normally might be trying to get away from, and to appreciate just the visual beauty and other kinds of sensory beauty more.

24:20

Russ Roberts: So, I want to take it in a slightly different direction. And to bring it to some standard EconTalk themes that listeners might be aware of. So, some people might say, 'Well, but you're wasting your time talking to that loser at the cocktail party.' And, 'That plantain weed is nasty. It's not as pretty as a rose.' Etc., etc. Now, you used the 'essence.' But I think of it--and this is the tie-in to other EconTalk themes, I think of it as a narrative, a narrative that we have running in our head about who is worth talking to, what's worth looking at. And we have that same narrative running in our head about politics. We have it running in our head about religion or anti-religion. We have it running in our head about our marriage, about our family, about our friends. And as a result we fit everything into that narrative. We have a terrible tendency to cherry-pick reality and ignore the stuff that doesn't fit the narrative. So, that person with the ugly t-shirt or the arrogant sneer obviously is a waste of time: where, in fact, you could be wrong. That weed is--you've got this baggage you've been carrying around because you try to get it out of your yard; but it is beautiful. A starling--my favorite example of this is, a starling is a gorgeous bird. There are a lot of them; and they are also a big nuisance to a lot of people, so they've got a bad rep. But if you watch a starling in the sunlight, it's a gorgeous, iridescent creature that you've been sort of talked into, culturally decided, without much thought--without any thought. And that's your feeling about the weed. That's your feeling about that person you are treating like a weed, to be avoided, ignored, gotten rid of. And I just think, when the things you are talking about were correctly--the clarity that you talk about isn't some mystical--you know, 'I'm seeing the universe in some new way.' Although that can happen. But it's really as much about the fact that you are missing out on so much, because you are running this movie in your head that you've directed; and you've got the ending figured out; and anything that doesn't fit in with that plot, you just cast out. And you're missing out.

Robert Wright: No, that's absolutely true. I mean, I kind of distinguish between the weed and the person at a cocktail party. I would say it is just objectively not true that the weed is ugly. Because beauty--that's an entirely subjective thing. So, if you don't think it's ugly, it's not ugly. Now, there is such a thing as a case where if you were talking to one person at a cocktail party, it would do more for your career. That's possible.

Russ Roberts: Absolutely. No doubt.

Robert Wright: So, that's a slightly different case. At the same time, you know, first of all, you are right: People--I just started doing Uber and Lyft and so on. I mean, every conversation--I've talked to cab drivers all my life, so this is not in a certain sense new. It's just kind of a new demographic that I'm talking to. And, you always learn stuff. And, moreover, you know, if you look at the way you are feeling at a cocktail party, when you just urgently trying to, you know, maximize your social and professional opportunities, are you really happy? It's a restless, unpleasant feeling. It's like a desperate feeling. Now, that said, you know, even if you talk to accomplished meditators and teachers, they are not entirely impervious to--even the career implications of things. You don't have to worry about becoming entirely blind to that. Still, it is worth remembering that you just never know what path will lead to what. Right? It's like--I just--I can give you an example. I just thought of this. It's like, the title of my book, Why Buddhism Is True--first of all, it has pros and cons. I can understand people finding it obnoxious and arrogant. I am willing to defend it at press, and I have a whole appendix in the book that does. But, one thing that's interesting is, one of the more painful experiences of my life was a review of my last book, The Evolution of God by Jerry Coyne, who wrote a book called Why Evolution Is True. Now, I didn't consider the review fair--as is not unusual among authors who get negative reviews. I wrote a big--the New Republic let me print the reply in the actual magazine. But in any event, I suspect--I mean, I just consider that a wholly unfortunate, bad experience. In retrospect, I suspect that if that had happened, I wouldn't have had--I mean, that's probably the reason the phrase 'It's True' popped into my head, because he had occupied such a prominent place in my memory. And, I have to say, for commercial purposes, at least the title seems to have worked. You know, the book's doing well. So, the point is just: You never know. You never know what experience is going to lead to what. And, that's a reason for us all to obsess a little less over trying to seemingly maximize the kind of career- or whatever kind of potential of every moment that we engineer. So, I'm kind of just reaffirming what you said.

Russ Roberts: I just--just to extend it to a different EconTalk theme: there's a certain level of trust in emergence rather than in control. There's a certain--even at the individual level where you have to--and I always like to say, 'The dishes don't do themselves. You have to do them.' You can't rely on the market to do your dishes, or some unseen process, or self-regulating process. A lot of things in our daily life require our intention, our execution, our planning, and so on. Unlike, say, worrying about whether there are going to be enough pencils next year because the Chinese are sending a lot of kids to school who used to live in the countryside. And, 'Oh, my gosh! I'm not going to have any pencils.' And somehow that problem solves itself. We don't need a committee. And I don't have to worry about it. I just show up at Staples and they sell me pencils. I don't have to be told, 'Well, we sold them all to the Chinese. They are gone. No pencils till 2019.' So, I--there's an inevitable top-down aspect to daily life as an individual, and I would say as a family member. But I think the process that you are talking about--again, it's certainly in many religions--not just Buddhism--of letting things unfold without trying to manipulate every moment. It certainly makes you happier. But some people would say, 'You are just naive. You are foolish. You are letting things happen when you need to take charge of your life.' It's not so much, just being a cork in the ocean. It's about the process itself and a willingness to be surprised. And I think for a lot of us, surprise is painful. It scares us. And uncertainty scares us. And we want control.

31:32

Russ Roberts: And that's a nice segue to the evolutionary side of this book. Because I think, obviously, we spent a lot of our evolutionary history without control, living outside. With predators. So, it's a natural impulse. And I'm not sure it's such a healthy one in our environment. So, talk about, and react to that if you want. And then talk about what you see as the role of evolutionary psychology in thinking about these issues.

Robert Wright: Well, I certainly agree that--I mean, I'm reluctant to agree because it does sound a little like a Hallmark [?card?] of shame. And, you know, when I say something about letting go and, you know, going with the flow, and so on. But there truly is a kind of logic behind it. The--I also want to reaffirm what you said a little earlier about stories. We have stories. And in a way this is a segue to the evolutionary psychology part, because we are creatures who tell stories about ourselves. I think we are designed by natural selection. Of course, I put "designed" in quotes. And it's natural selection--not a conscious process. But I think our minds are designed by natural selection to develop and cling to a story about ourselves. You know: 'I am the person who writes good books.' And so, any reviewer who gives me a negative review is a bad person--

Russ Roberts: An idiot.

Robert Wright: Right. And I will immediately look for bad things to say about that person. I mean, this stuff happens automatically. I mean, you don't have to think about any of that to--and yet, when you look at it, objectively, obviously this is not clearly a vision. Because, you know, there is no book that shouldn't have some negative things said about it. It doesn't mean that the person who said them is an idiot. And, broadly speaking--this is, this is kind of the broadest connection of Buddhism to evolutionary psychology--is that, as I said, that Buddhism says: 'We are inclined to suffer recurringly. We are inclined to not see the world clearly. There is a connection between the two. If we saw the world more clearly we would suffer less.' Well, when I emerged from writing my book on evolutionary psychology, The Moral Animal, I was convinced of two things: We were not designed by moral selection to be happy. For starters, gratification is designed to evaporate. You know, you eat food, feels good for a while, then you hunger for more. That makes sense as a way to design an animal if you want it to stay alive. Right? For it to get recurringly hungry and for the gratification to evaporate. Secondly, feelings like fear and anxiety are natural. They are designed for a purpose. Although they often misfire in the modern environment--which I get into in the book and complicates things. Still, the point is: Natural selection is willing to use our suffering as a motivator in many ways. And, the other take on my head, after writing about evolution, you say, 'Psychology was[?] not designed to see the world clearly.' There are trivial examples like this, like people tend to overestimate the speed of approaching objects. Which makes sense, because it's better to get out of the way--

Russ Roberts: Better safe than sorry.

Robert Wright: Right. But that's an out and out misperception. That's a clear, objective misperception of the world. And there are all kinds of subtler misperceptions. Some of which are emphasized in Buddhism and borne out in evolutionary psychology. But, at any rate, I decided--this is one reason I decided to write this book: I thought that Buddhism needed to be looked at, and mindfulness meditation in particular with a kind of systematic reference to the process that created the human mind, natural selection, because I think that does tend to validate a lot of the claims made by Buddhism and tend to explain why mindfulness meditation can be not just a successful therapeutic exercise but a way to actually clarify your vision. Because, these feelings that are built into us are, again, not designed to get us to see the world clearly but just designed to motivate us.

35:46

Russ Roberts: That's incredibly interesting. I guess, the thing that troubled me about a couple of things in the book--one,--not that I'll give it a bad review, Bob. Don't worry. The thing that troubled me, one thing that troubles me about the evolutionary psychology approach is that it is a little bit of a Just So story after the fact; and I think it's very hard to disentangle, say, my desire for control with my primitive ancestors, my personal genetics, the cultural baggage I've picked up during my lifetime, cultural baggage I was given by my parents when I was small and can't remember. So, to me, it's a little more complicated. And in fact you could argue, based on the data, that natural selection must have designed us for suffering--because we do a lot of it. Now, I understand your claim that we're burdened with a primitive mind not so fit for modern times. But an alternative interpretation would be: The human lot is to suffer, the human lot is--because if for no other reason, we're the only animal that I know of that knows its death is inevitable, and has to live every minute of adult consciousness with that awareness. I want to raise a question that I didn't find in the book, which I miss, about consciousness. Consciousness is really what gives us suffering. We could have been an animal--all the other animals, they have primal drives; they can't resist them at all, right? They're really bad it. We're not good at it, but we're better than they are in some dimension, I suppose. Or at least we think we are. Maybe that's an illusion. But, it seems to me that the evolution of consciousness, the awareness of our suffering, our awareness of our challenges in life--and I don't want to be a pessimist; I think there's a lot of glorious things in life, obviously. I'm just being a little bit of a devil's advocate here. But it seems to me that consciousness itself is a big source of our challenge. And I don't think we have a very good evolutionary understanding of consciousness. What do you think of that argument? Do you think we have or will have an understanding of consciousness that will help us? Or, do you think we've already solved it in the current psychology literature and the evolutionary psychology literature?

Robert Wright: First, quickly, so you are right about the kind of evidentiary challenges that evolutionary psychology faces, and actually evolutionary biology. Showing that any trait is actually a product of natural selection is a distinctively challenging thing in the sciences. And I talked about that in my book on evolutionary psychology. But you're right that different claims about what is adaptive, a product of natural selection, deserve different degrees of confidence. And that includes a thing I said about approaching objects: we don't know for sure that that's an adaptation. But, I deal with that in the evolutionary psychology book. You're right: it's a [?] valid question. I'd also emphasize: I agree with you, suffering is built in by natural selection. That's part of the problem. It's not the only--but you're right it's not the only problem. So, anxiety is natural. To care what people think about you is natural. And for that to sometimes cause anxiety is natural. But, then, in a modern environment you are thrown in a situation where you are suddenly speaking to a hundred people you've never met. That's a new kind of situation. So, it's not surprising that public speaking anxieties are particularly problematic; and particularly unproductive. They are usually not helping you. But anyway: On to consciousness. Now, my view of consciousness is, first of all, it's mysterious. In fact, I'd say, if you want a book title that is arguably as audacious as mine, it's Daniel Dennett's Consciousness Explained. He's as audacious--I don't think we have a satisfactory explanation of consciousness. I think you're right that self-awareness introduces a new dimension to suffering. I assume that when my dog feels pain or feel, it's unpleasant. But it's true that knowing that things will bring--well, it's like when you are at the dentist, you know. It's like the anticipation of the unpleasantness is half of the problem. So, self-awareness can bring new kinds of problems. If you mean--I mean, let me say something about consciousness that may not be what you are interested in.

Russ Roberts: I don't care--

Robert Wright: But, it may be too cosmic and it may be--

Russ Roberts: Yeah, I'm not interested in anything. Go ahead--

Robert Wright: may be too metaphysical, either in the legitimate[?] Western philosophy sense of the word 'metaphysical' or in some indefensible sense I don't know. But, I sometimes think that consciousness--I mean, it's kind of a mystery why it's with us to begin with. Why it is like something[?] to be an animal. Because you can in principle imagine, you know, animals that are built like they are built, do what they do. I mean, it's not like anything to be them: they don't have subjective experience. But, in any event, there is subjective experience. And, one thing I wonder is whether it's like reasons we don't totally understand, the way complex consciousness can develop in this universe is through an evolutionary process that creates these complex biological systems of information processing. But, by virtue of the nature of the dynamics of natural selection there has to be in a sense a distortion of consciousness, a warping of it, to bring it into existence. Because, this is--stop me if I'm going too far, Russ. But, because of the weird criteria by which natural selection designs things, whatever gets the most genes in the next generation, wins--I mean, after all, that is, it is that criterion that so often fills our consciousness with a kind of grasping or a recurring dissatisfaction. It's--rather than letting us relax into a simple awareness of, an appreciation of the world. Right? It's because we were designed by natural selection that our consciousness is so often--I don't know, you might say adulterated by this grasping. And, I would say, out-and-out warped. I mean, our perception is out-and-out warped. In various ways I talked about in the book. As a legacy, I think, of the fact that natural selection created the mind. And maybe it's the case that we can in principle use the reflective power that, as you noted, we have, to reflect on the way our minds work, and engage in things that even change the way our minds work, such as meditation, to remove at least a little of what I am calling the warping from consciousness, and let it relax into a state that is a lot more pleasant for us. And I would say at least as productive as us. Now, I may have said at least as much as you want to hear about consciousness.

43:40

Russ Roberts: I'm happy to say a little bit more. I'm going to push it in a different direction. Which is: A number of serious philosophers have suggested that there is no evolutionary justification for consciousness. These are atheists, by the way, which is important to note. They are not trying to justify a non-evolutionary view of the world. I would add, by the way, that I believe in God. I want to come back to the religious aspects of my meditation maybe at the end. But I don't think believing in God or leading a religious life is inconsistent with evolution. I have no problem with it. I know others disagree with that. But I'm just--that might be important to mention. But a lot of serious philosophers who are not religious think that there is no evolutionary explanation for consciousness; we're going to need a different understanding of biology and evolution to get to understand how the mind is where it is today. The modern mind, the human mind. And that's a weird thought for a book like yours, because you are arguing that we are burdened, our consciousness or our brain is burdened by this evolutionary legacy and that Buddhism or meditation can unburden us. And yet, it's kind of weird to think about the possibility that it's not evolution. I'm not saying it's something else. From a secular perspective we have no idea what it is. But, it's a little bit weird.

Robert Wright: Well, the whole thing is weird. I mean, I think--my own guess is that, um, there is some kind of metaphysical law, in a legitimate sense of the term 'metaphysical' that associates consciousness with certain kinds of information processing. I want to say--and this is related to God in a certain sense. Because I've actually argued in other places--I think never with as much clarity and care as I should argue at some point. But, I've made the argument that if you step back and look at the entire evolutionary process, not just the biological evolution that created human beings, but the cultural evolution, meaning technological, all kinds of scientific, political, so on, evolution--that has gotten our species to the brink of a global community; and that has built this thing that looks like a global brain, the Internet--

Russ Roberts: yeah--

Robert Wright: I've argued that, um, it's not crazy to think that there's some kind of purpose, larger purpose unfolding. Even if you have a strictly materialist view of what drives it. Which I basically do. I mean, I just--a natural selection creatist. That set in motion these material technologies and so on. So, you can have a materialist view of the whole process, and yet step back and see it as yet in a certain sense a single kind of co-evolutionary process that's been building something that looks like a giant planetary organism. And I think it's not crazy to wonder whether that in some sense manifests a larger purpose--leaving aside the question of what, whether what instilled the purpose was a God or something more like some kind of meta-natural selection process. Whatever. But the point is: If you view it that way, then maybe when people like you and me recommend reflecting on our, our feelings and thoughts, with an eye to revising the way we perceive the world and behave, that, on the one hand we seem to be flowing against the stream of natural selection. And in fact in the book, I say, 'Look, if it helps you to think of [?] Michael's meditation as a rebellion against natural selection, fine.' In some sense it is, because you're kind of trying to rid your mind of some of the distortions built into us. That said, it could be that if we want to progress in the larger evolutionary sense--in other words, build a cohesive global community that is not fraught by all kinds of tribal conflict, ranging from sectarian conflict in the Middle East to political polarization at home in America as we see now--it may be that if we want to do that, and sustain the evolutionary process in that larger sense, we need to attain some kind of metacognition of one kind of another, whether it's via mindfulness meditation or whatever--that does give us a critical perspective on the minds that natural selection left us with. Does that make sense? So--

Russ Roberts: Well, it's a--there's a lot there. That's a very provocative set of thoughts. My footnote to it is that you don't have to be religious to think that there are some glorious things in the world that have nothing to do with natural selection. Our love of--our love of beauty. It's hard to understand that that is selected for. It's just a by-product, maybe. Just something that came along. We don't understand it, obviously. But there are many, many things. And the idea that we have a meta-consciousness as a species through things like the Internet, through EconTalk just to pick a slightly less grand thought--that, it's such a beautiful thing to me that there are tens of thousands of people listening to this conversation--not simultaneously, because they are hearing it recorded. But, somehow, we're together. And I get wonderful email from you out there. You know, you say, you write me, and you say, 'I feel like I know you so well.' Which is weird, because you don't know me at all, the listener. And yet, somehow we have this communical[?] experience. Which has--I don't think it has anything to do with extending the species. Or our genes in the next generation. But it's a beautiful thing. And, um--

Robert Wright: Yeah, it is. I mean, there are evolutionary psychologists that have made in a certain sense, well, that a lot of our aesthetic preferences can be explained by natural selection. And I'm generally a booster of explaining a lot of things via natural selection. That said, when I appreciate this on a meditation retreat or in daily life, the way a more relaxed consciousness, a more relaxed mind is more appreciative of beauty, I sometimes wonder, you know, just [?] and whether appreciation of things is almost the default state of consciousness. And, you know, it's--and it's--and again, it gets kind of warped in a sense in its normal, everyday workings. But I certainly do not believe that consciousness, per se, is adequately understood.

50:12

Russ Roberts: I'm a big fan of wonder. And I think wonder and awe are undervalued in our culture--not undervalued in our culture; just we all of us miss out on a lot. And it's out there. It's everywhere.

Robert Wright: That is a feeling that is well-cultivated by meditation. I have, especially on retreat, I have found myself almost literally, at the risk of discrediting much of it entirely, almost literally caressing a tree. In other words, just looking at the bark, the structure of a bark on a tree. And, you know, examining, going--you know, I normally don't notice this. It's amazing.

Russ Roberts: And, to reduce my credibility: I mean, there are many moments in those experiences where--and you write about this in your book--where you are moved to tears by things that don't normally move you to tears. And--it's a deep question about where you are going, if that's the real you, or someone you've created through this bizarre, unnatural experience.

Robert Wright: But it's important, because I think you are kind of emphasizing: We are not talking about a kind of neutralizing of experience.

Russ Roberts: Yeah; sure.

Robert Wright: Which people sometimes think. They think, 'Well, wait: you are going to dull all your feelings?' No. You change your relationship to your feelings. You can become less enslaved by problematic feelings. But, in a certain sense, life becomes more poignant.

Russ Roberts: No, I think--and you could argue that's not a good idea. And similarly, you could argue--I disagree--but you could argue also, 'One of the things I like just most in life is letting my thoughts just wander around.' You know: And, see where they go. And don't try to stop them. And don't try to be aware of them. And, 'Getting lost in my thoughts is one of my favorite activities.' And meditation is, suggests that maybe that's not the best practice. And yet, I'm kind of addicted to it. And it's interesting to have to deal with that as a meditator.

Robert Wright: Yeah. I mean, it's true that one of the first things that happens, and we now know this through brain scans, in meditation, when you succeed in relaxing, is that your so-called 'default network' quiets down. That's a network that is active in your brain when your mind is wandering. But, it's not like you are ending all mind-wandering. You're going to be walking around. It's still going to be happening. It probably has some function. But, an interesting thing I've noticed--presumably one function of mind-wandering is you address little issues and you solve certain problems. Sometimes when I'm meditating, I'll attain a state of calm and suddenly an idea will just pop up that actually is the solution to a problem--in my life, or it's an idea that I should pursue. And it's important to remember that--and I certainly emphasize this in the book--there's a lot of subterranean activity in the mind. There's a lot of stuff going on. And in fact, one commonality of modern psychology and traditional Buddhist teaching is to be kind of skeptical of the extent to which what you think of as the conscious self is really in charge in the first place. Right? More than I think we realize, the work is being done at a subterranean level by perhaps a variety of kind of actors in our brain that have different agendas. And the results of the process are kind of injected into the consciousness. And, so, to the extent that that's true, there's less to worry about than you might think, of kind of relaxing. Because the truth is the conscious mind is designed to think it's doing more than it actually is in the first place.

Russ Roberts: Yeah, we've talked about this many times in the program. The example I always like is Andrew Wiles's solving Fermat's Last Theorem.

Robert Wright: Right.

Russ Roberts: He proves it. Turns out the proof is flawed. He spends a hellish month after month trying to repair the flaw. He can't. And he's in true--talking about suffering--he's in total despair. And, just one day he's sitting at his desk and he sees it. He just sees it. And the answer to how to prove it. We've all experienced this in daily--once you get older, you've experienced this in daily life, frequently. Which is: You want to remember somebody's name or some movie or who wrote that song. And you start thinking about it. You go through the alphabet, trying to figure out what letter it might start with to trigger your memory. And what almost always works for me, and I think it works for everyone, is: Stop thinking about it. And in ten minutes, have someone ask you about it again. And it just pops right into your head. It's something about the way our brain accesses the hard drive. It's obscured from us, obviously. Like many things are.

54:48

Russ Roberts: We've probably lost all of our economics listeners. But in case any of them are still hanging on: What are the implications of the mindset that you are talking about in the book, which is, you just referenced, which is the, 'I feel like I'm in charge but I'm really not', which meditation forces you to confront? What are the implications of that for economics, say? Or public policy? A lot of people would argue, 'Because we don't really know our own best interests, we need to be taken care of. We need to be nudged. Paternalism is necessary. And it's not just something we should hold our nose at. It's imperative.' What are your thoughts on that? Especially after you've been thinking about this for a long time.

Russ Roberts: Actually, not. Because I already did that with the emergent stuff. Now is your time to bring it back into the--I have to[?] run people's lives--

Robert Wright: It's an interesting question--

Russ Roberts: because they are a bunch of crazy people.

Robert Wright: I guess, I wouldn't--it's not so much that would see policy implications. At least, none are occurring to me right now. Maybe if I meditate for an hour, some will show up. But, I think there's an interesting analogy, just metaphorically, between the libertarian approach to the economy--and I should concede, I'm not a libertarian, at the risk of alienating maybe some of your listeners. But, there's an analogy between that and the way the mind works. In other words, the libertarian attitude toward the economy is maybe a productive attitude to the way, a take toward your mind, and in a certain sense one that's being encouraged in mindfulness meditation. Which is to say: Trust the--well, trust a certain set of the workings of it--you know, a little more than you do.

Russ Roberts: But I want--Bob, I want to push you in the other direction.

Robert Wright: Okay.

Russ Roberts: You know, the psychology of the book, which we haven't gotten into very much, the psychology research, partly because I'm a skeptic about psychology research--but that's a topic for another time. The psychology research that you bring, and you could argue the evolutionary material that you bring, suggests that the human brain leads us to illusion. And certainly this is the Buddhist perspective as well. So, we're all full of illusion, full of delusion. And we don't know what's best for ourselves. We eat too many power donuts and we don't sleep enough and we spend too much time on the Internet. Etc., etc., etc. Can't control our urges. And so therefore we need a more powerful state and a more powerful interventionist government--

Robert Wright: I see--

Russ Roberts: to take care of us. Because we're so deeply flawed.

Robert Wright: Well, I would just say that to the extent that we don't solve our problems ourselves, there is a stronger case for that. I won't rehash all the standard arguments, which is that, if drug addiction is creating negative social externalities, then it is, you know, then it is a more legitimate public policy target than if it's not. Although I think you could make a case for--in some sense, either way. But certainly it's, it's--well, I guess I would say that we're talking about a set of techniques when we are talking about mindfulness meditation that can empower people to solve some of their own problems without forms of assistance that might have otherwise come from the government, in principle. And, by the way, the treatment of addiction--there's this specific kind of mindfulness technique. I talked about it a little bit in the book--

Russ Roberts: Yep.

Robert Wright: that helps people quit smoking and so on, like that. I mean, even though I'm not, I'm not a libertarian, I'm in favor of as much self-reliance as possible in solving problems. It's just almost inherently more efficient. And, I think this is a major set of tools to use in that regard. I don't know if that responds to your question--

Russ Roberts: [?], no, that's great [?]--

Robert Wright: I may have continued to resist your agenda. I'm sorry.

Russ Roberts: Not at all.

Robert Wright: My ideology compels me to resist.

Russ Roberts: No, you took me in a direction that I--that was great.

59:14

Russ Roberts: Let me mention Adam Smith. We've talked about his work, The Theory of Moral Sentiments, and Smith talks about man's--the human being's--desire to be loved and lovely. We want attention; we want to be respected; we want to be admired; we want to be liked. And we want to be worthy of it--which is the twist on it that I think doesn't fit so well with the evolutionary--first part fits fine with evolution. Second part is more--is a little harder to square. He argues that we want to be--we actually want to be good. Because we want to earn the respect that other people have for us. We want to recognize that we are relatively unimportant relative to other people even though everything inside us says, 'Me, me, me.' And he says all that without relying on benevolence. He doesn't think we're very benevolent or good-hearted to start with, but he suggests that culture encourages us to be less self-interested than we otherwise would be, because we want that respect from other people.

Robert Wright: Right.

Russ Roberts: And we want to have it fully. Reflect on how that fits in with, say, Buddhism, or how meditation might interplay with that.

Robert Wright: Well, first of all, I think it's pretty broadly consistent with evolutionary psychology in the sense that we do--it makes sense that we want the esteem of people. That seems to have been correlated with getting genes into the next generation. Having the esteem of people, being highly thought of, having high local status, and so on. And that includes having esteem in matters of moral conduct. We want to be thought of as good people. Now, in fact, that tendency seems to be so strong that we have mechanisms for convincing ourselves that we are good even when we are not. I mean, if you ask--survey after survey has shown is if you ask people whether they are better morally than the average person, a large majority say they are. Well, obviously, they are not all right. Right?

Russ Roberts: Well, criminals, I think, see themselves--I'm sure there's survey data on this, but I've seen casual data--that, they think of themselves basically as a good person.

Robert Wright: Right. Now, that's the way we are. And that kind of doesn't sound all that harmful. And a slight inflation of something. At the same time. But the flip side of that is convincing ourselves that various other people who are impeding our short-term agenda are bad people. And so on. There's a whole set of moral biases built into us that in the aggregate are not--well, to put it in economic terms, are not conducive to social efficiency, really. They lead to--we waste a lot of time--distorting the data, so to speak. And telling stories that distort the data. And behaving more badly than if we had a clear view of ourselves. And, meditation, I think, is good about clearing away those obstacles. And, in fact, those distortions. And in fact, if you ask: What does Buddhism mean by these crazy-sounding claims like 'not self'--like, the self in some sense does not exist? Or, 'emptiness'--that things don't have essence? I argue in the book--I mean, leave aside what the full-on not-self or emptiness experience is like. Very few of us will ever find out. We just won't meditate for 5 hours a day for 5 years or whatever it might take us. I think we do make incremental progress toward, in a direction of those things. And that incremental progress is very easy to understand. It's just a slight dilution of, you know, unfair judgments of people; an exaggerated sense of moral entitlement; and things like that. And, I think that's all to the good. And it would be one thing if I was asking people to sacrifice--because I know, some people think, 'Well, wait. Then I'm not pursuing my agenda. I'm not, you know, I'm not getting what's mine.' Again, the Buddhist claim, which I think is borne out, is that becoming a better person can align with becoming a happier person, and with seeing the world more clearly. That's an amazing claim, when you think about it--that you can kill three birds with one stone. But, I think it's true, it's not trivially easy. It's not magic. You have to decide that meditation is worth it, stick with it, and ideally view in light, in a kind of philosophical light of the kind we've been describing. But I really think the central claim is true.

Russ Roberts: Well, Smith says, later on he says--later on, still in The Theory of Moral Sentiments--he says there are two paths in life to get us admired, respect and love. One is fame, power, and money. People who are famous, powerful, and rich get a lot of attention and satisfy that urge. He says the other way is to be virtuous and wise. And he suggests you take the less glittering path, the one of virtue and wisdom. And the reason--we can close on this--the reason I mention it--I want to bring in a couple of things from before, as well. The strange thing I find about the Mindfulness movement, what some people call 'McMindfulness'--the commoditization and commercialization of mindfulness so that it's--'It's going to make you more productive! It's going to make you happier!' And I think that a--it's not what actually happens, at least in the direct consequence. It could be a second-order effect through the goodness mechanism. And I do--as a religious person, a part that religion brings to my meditation is a desire to be good, not just happy. And I think that's missing from a lot of, say, corporate mindfulness programs. I am guessing. I don't know. I don't spend a lot of time at them. Go ahead.

Robert Wright: I suspect that's true. They certainly try not to connect--in these institutional settings, they tend to try not connect any of this to Buddhist philosophy. That just creates political problems for them to the extent that it sounds religious. Even though we are basically talking about secular Buddhism, not the supernatural part. But, um, yeah. What I'm trying to show in the book is not like how to be happy. There are books like that. I am trying to make the case that in principle, this kind of happiness is a valid happiness. Which--in other words, it can align with better behavior, a clear perception of the world. So, in other words, there can be a convergence of happiness, moral truth, and truth--objective truth--about the world, so to speak. In principle. And I agree with you that--I think the best way to approach it is not to worry about the happiness part. Try to view the world more clearly. And try to focus on impediments to behaving decently toward your fellow human beings. Um, and the rest will fall into place. And, and, I try to focus on at least those two dimensions, at least as much as on the happiness part.

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The Revenge of the Countrytag:www.econtalk.org,2017://2.153442017-09-29T18:35:50Z2017-10-02T13:04:31Z When EconTalk host Russ Roberts looks at the series of images in Philip Auerswald's Medium piece on the rise of populism, he sees "a Milky Way of darkness instead of brightness." Auerswald describes the populist phenomenon as a global...Amy Willishttp://www.econlib.org
When EconTalk host Russ Roberts looks at the series of images in Philip Auerswald's Medium piece on the rise of populism, he sees "a Milky Way of darkness instead of brightness." Auerswald describes the populist phenomenon as a global trend, not at all unique to the United States, and calls it, only slightly in jest, the "revenge of the country," or the emerging tension, caused by voting systems, between urban and rural.

This week's episode takes a deep dive into this phenomenon, which Auerswald argues is explained by three trends worldwide: urbanization, depopulation of rural areas, and advances in digital technology. How will these trends affect politics and the economy, and your life in particular? We hope you'll take a few moments to share your thoughts with us; we love to hear from you.

1. Auerswald argues that it's inherently destructive to the community when people move away from small towns and rural areas. Why does he thinks this is the case, and to what extent do you agree?

2. Have you ever lived in a community like the ones (above) Auerswald is referring to? Anyone from Roberts's dark "Milky Way?" What's been your experience, and how closely does it match Auerswald's description?

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3. Auerswald says that when countries, like Turkey, become more democratic, they tend to "lose control" of the non-urban parts of the country. He says this is an advance for democracy, but a loss for liberal democracy. What does he mean by this, and how accurate do you find this claim?

4. Auerswald is critical of scholarship on production, suggesting that instead it's the way that people's skills interact with each other that really counts. Why isn't his accounted for in scholarly analysis? This leads host Roberts to ask a related question reflecting his skepticism. Would Apple have become Apple if it were not located in Cupertino? Why does Russ ask this question of Auerswald? How would you answer the question?

5. Roberts and Auerswald agree that using the 1960s as a frame of reference for talking about growth and structure of communities is problematic. Why?

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Philip Auerswald on the Rise of Populismtag:www.econtalk.org,2017://2.153292017-09-25T10:30:00Z2017-10-13T11:28:35Z Author and professor Philip Auerswald of George Mason University talks with EconTalk host Russ Roberts about the rise of populism in the United States and throughout the world. Auerswald argues that the rise of cities and the productivity of...Russell Robertshttp://www.econtalk.org
Author and professor Philip Auerswald of George Mason University talks with EconTalk host Russ Roberts about the rise of populism in the United States and throughout the world. Auerswald argues that the rise of cities and the productivity of urban life has created a divergence in experience and rewards between urban and rural areas around the world. Auerswald ties these changes to changes in voting patterns and speculates about the sources of the increasing productivity of metropolitan areas.

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0:33

Intro. [Recording date: September 5, 2017.]

Russ Roberts: Our topic for today is an article that you wrote recently at Medium.com, which of course we'll link to; and the title is "The Origin of Populist Surges Everywhere," which is a pretty bold title. And you start your essay with a very provocative set of maps--which could alarm listeners who can't see them. They welcome to go the essay, of course, but we're going to, I think, describe them pretty simply, as they're pretty clear. There are three maps. They are organized by county. They show the change in the intensity of Republican and Democrat voting in the 2012 Presidential election as compared with 2004--that is, how much more Republican or how much more Democrat a county voted in 2012 versus 2004. The second map shows overdose death rates, mostly from opioids. And the third is the rates of firearm suicide by counties. And they look pretty similar. Those three things seem to be geographically correlated. What do you conclude from those pictures?

Philip Auerswald: Well, so that was my way in to this particular post, was just this conjecture that maybe something about the rural/urban divide in this country was correlated with some other variables. And, really, it was just on that, on a guess that I pulled out these particular three. I actually didn't mine this intensively at all. But when I looked at them, it was pretty striking. You know, of course, this is all just correlations and just eyeballing when it comes to the way it's presented in the blog post. There are some links that I provide within the post; and of course there's a lot of related literature that I think substantiates these as being significant correlations. But, really, it really began as an exploration about the significance of the rural/urban divide in the United States in particular as really the--likely the decisive element in terms of the outcome of the 2016 election. But I should say: I posted this July 20, 2016. And so, of course, after the election there was a lot of writing on this topic. Before, there was some. July 20, 2016, there wasn't very much. So, um, I think that, you know, on that level it would have more prescience than if I published it today.

Russ Roberts: The thing that I noticed--it's interesting: I noticed something different from what you highlighted. What I noticed was that there was a band, a sort of Milky Way of darkness instead of brightness, that ran from maybe West Virginia down through Arkansas, where there were increases in Republican voting, increases in firearm suicides, and increases in opioid deaths. You, however, focus--which is the flip side of the same story, in your essay--you focus on what you call mega-cities. [Or, mega-regions--Econlib Ed.] So, talk about what a megacity is. Identify the ones that are relevant for this picture, or maybe more easily the ones that aren't. Most of them are relevant. And, why you want to talk about megacities.

Philip Auerswald: Well, yeah, I mean--that band should have--you know, West Virginia and over through, really eastern Missouri, it also reaches up into northern Wisconsin and Michigan, significantly for the outcomes. But that really is the sort of focal point when you just look at the maps. The significance of the megacities is simply that, Ed Glaeser wrote a magnificent book just a few years ago, the Triumph of the City. And the point that he is making in that book is an important one and I think one that is not heavily disputed. Which is, that the 21st century, certainly the 20th century going into the 21st, has been an era in which the largest cities have become even more dominant and have driven the advance of human society and human prosperity. And he really tells this as a positive story. But, in a way, when we think about the origins of populist surges--and I really want to point out that this isn't just the United States: that the point is this is a global phenomenon--that it is something that is really kind of the revenge of the country: You know, if we think about the triumph of the city as being the baseline. And, so, there really are not just the sort of dominance of the largest city, but increasing dominance of the largest city. And that's, that's really the kind of backdrop for the maps, I think, in the post.

5:56

Russ Roberts: And, by megacities--you don't just mean, like New York City. You don't just mean, say, Denver. You are talking about the whole--various corridors of population density.

Philip Auerswald: Yeah. I mean, to take a step back from the United States, which is sort of the next step I take in the post: That, if you didn't know anything about Republicans, Democrats; you didn't know anything about Brexit and Marine Le Pen; you didn't know anything about Vladimir Putin; you didn't know anything about any of that--and you were trying to sort out what is happening on this planet with these people at this particular point in time. And, let's say you had been watching human society, human civilization, for a number of centuries, if not millennia. There were three things, or let's say there are three things that I think would really stand out. One of them is what we've just been talking about, is urbanization. We are a social species. We have become increasingly densely interconnected within urban areas. And so we know that story. That's the Triumph of the City story. And if anything, the gap between the largest metros and the rest of the world is growing. The second is de-population--combined with population aging. And this is a phenomenon we have never experienced previously in human history. Now, when people think about depopulation at a global scale, the tendency is to think about it as sort of a 2050 phenomenon, because that's when the United Nations' population projections sort of plateau; and then you sort of go into either just sort of a steady level or population decline. But the reality is, that all of North America, all of Europe, and all of East Asia today are at below replacement-rate fertility. Which means, absent population aging and immigration, all of North America, all of Europe, and all of East Asia would be in population decline already. As well as the populist developing countries such as Iran, Brazil, and so forth.

Russ Roberts: When you say, "aging," you mean: If we live longer.

Philip Auerswald: Right. So--

Russ Roberts: Consisting--a growth in population, but it still would be probably a growth of non-working people. So, the working population almost certainly, if these trends continue, is going to get smaller in those areas. Correct?

Philip Auerswald: Exactly. Exactly. And so, there's a tendency to fixate on Japan in this story. And certainly Japan has been a leading edge; and we can talk about how Japan has been the world's leading creditor nation for the last quarter century. I don't know if they've just been overtaken by China. But it has been in that category for a long time. And this is just the same time that their working age population began to decline; and then their overall population began to decline. But it's far from Japan being the only one. It's a global phenomenon. And again, this has never happened in human history that we have this trajectory of population decline at the same time that we have aging. Usually when you have population decline, it's an indira[indicator?] of, you know, plagues, wars, so forth and so on. And, the third one is what I talk about in The Code Economy. And I think it's equally as significant as the first two, which is the advance of technology as code. And so, just all the gadgets--AI (Artificial Intelligence), automation, all these things that we talk about, the whole various, you know, set of categories we think about as the advance of the technological frontier--um, this is the third sort of major driver. And, when you intersect those three, then you get the origins of popular surges everywhere. But it's a global phenomenon. It's not a U.S. phenomenon. And it's something that's rooted in these just fundamental trends that are not going to be going away any time soon.

9:36

Russ Roberts: So, let me just review them: Urbanization. Slowing population growth or even negative population growth--that is, a decline in population. And, an advance in technology. So, why should those things lead to more populism? Or any of those things lead to more populism?

Philip Auerswald: Well, so, I mean it's important to--

Russ Roberts: Sorry. Before we go on: By "populism"--you should first talk a little about what you mean by populism. I have an idea of what you mean. But, for listeners, talk about what that term means to you.

Philip Auerswald: So, you know, that I think is really a semantic question. There is a group of people who are rural and feeling as though they have relatively diminished opportunities in the world that they are living in today, as opposed to a quarter of a century ago or even 10 years ago. And then there's a group of urban--it's touchy to use the word "cosmopolitan," but it is an appropriate word--urban, cosmopolitan, international-ly[?] mobile people who live in the world's largest cities. And the interest of these two cosmopolitan historically--I mean, if we read Jane Jacobs or, you know, we really think about how cities have always interacted deeply as being really the source of innovation, the source of increased productivity for rural places, that these aren't two groups that are inherently in conflict. But, what we're seeing is, that as a consequence of voting systems--again, not just in the United States but throughout the world, that are--even sort of moderately disproportionate by geography as opposed to population, that you get this, this, this tension emerging. So, I would say populism really is almost defined as the political insurgency of rural places against urban cores in the largest cities. And you can call it whatever you want; but that's what's happening, really, all over Europe, in the United States, and elsewhere in the world.

Russ Roberts: And you get the phenomenon as a result of people, say, in London, where I have some friends who told me, 'I don't know anyone who voted for Brexit'--

Philip Auerswald: Well, yeah, exactly--

Russ Roberts: and yet a lot of them did. I don't know anyone who voted for Donald Trump. And yet, millions did. People will say that. And they tend to be in the same geographical location, those folks. And they can't understand it. I think in one sense, what populism--this is not an accurate definition, but I think it also gets at what you are trying to get at. You could think of populism as the sudden phenomenon that a lot of smart people have no idea what's going on. The inability to predict these changes. Certainly to understand them in advance and forecast them. Something's going on. And so the question is: Is it a cultural phenomenon? Is it an economic phenomenon? Is it a medical phenomenon? Is it a geographical phenomenon? And I think what's astounding about your essay--and I confess, I apologize, I didn't realize it was 2016--I'm now even more impressed by it: I thought it was written recently--is that, you really point out that a lot this is, appears to be geographic. For reasons that may be decisive. Obviously it could be correlated with other things that are correlated with geography. But the question is: What are those things? What is the fundamental change that's going on here? And you have a line in the essay where you say,

We are indeed in a world where the rich get richer. But it is the fact that rich cities are getting richer that matters most; that rich people are getting richer follows from that.

So, this argument is that it is that cities are very prosperous. Increasingly prosperous. Which of course is part of it. And that doesn't imply that rural areas are increasingly less prosperous. But, I think are, at some extent. And, talk about what you are getting at there with the prosperity of cities.

Philip Auerswald: Well, I mean--so, the richest cities in the United States make 34% more in terms of regional GDP [Gross Domestic Product] than America as a whole. The urbanites earn 30% more than rural residents. And, what's--you know--

Russ Roberts: That's on average.

Philip Auerswald: That's on average. Yeah. And then, just between 2010 and 2014, this has drawn--this particular summary is drawn from an Economist article, but Glaeser has a number of articles along the same lines, there are multiple sources. But, between 2010 and 2014, U.S. population grew by 3.1%; cities overall by 3.7%. But the 50 richest cities grew by 9.2%. Now, we haven't gotten to mobility. And that's part of the frustration of people in rural places, I would conjecture: Is that, as we all know, land values and home prices in those 50 largest major metros have gone up in the last 20, 30 years just to a dramatic extent. And again, this is a global phenomenon. You had Matt Rognlie's paper a couple of years ago sort of revisiting Piketty's results and finding that the sort of famed increased capital share relative to labor over the last 30 years was almost entirely accounted for by growth in real estate. So, this is nontrivial. On a macro scale, it's really the underlying determinant--again, if we believe that those numbers, you know, from Piketty, as I think analyzed very insightfully by Matt Rognlie, that, that, these really are the core drivers of inequality. And, also the core drivers of our restricted mobility. I mean, you simply, you cannot go to Midtown, to New York, even Brooklyn to live the dream of making it in New York, any way like my father did when he came from Northern Wisconsin to Columbia University in the 1950s. Or my mother, you know, differently coming from Tunisia[?] to New York City. I mean, this was an exceptional place where people like my mother and father could meet. And they could afford to be there as young people with really zero means from their family to sustain them otherwise. So, we are in a totally different world in terms of mobility. And, and, the divisions between the richest cities and the rest of the world are becoming increasingly acute. And those of us--and I readily confess includes me--spend almost all of their time in one of the world's, say, largest hundred cities. It's easy for us to be oblivious to these phenomena.

16:35

Russ Roberts: So, I just want to disagree with one piece of that, or at least clarify something. It reminds me a little bit--it's a very useful summary. Actually, I want to make two points. One is: Piketty's book was focused on this idea that the return to investment and the stock market was what gave the rich an edge. I thought that was silly on many counts. But the land point is not silly--the point you are raising. And it seems to me to be quite relevant. But it reminds me of the Yogi Berra expression: "It's so crowded, nobody goes there any more." Which is his line about a restaurant--

Philip Auerswald: Right--

Russ Roberts: that was suddenly popular.

Philip Auerswald: No, no, that's right--

Russ Roberts: It was a joke.

Philip Auerswald: No, no; I know the joke. And I like the joke.

Russ Roberts: But, what's going on in New York and in San Francisco, and in London, cities around the world, is that--and in China--is that lots of people are moving there. It's not that you can't move there any more. A lot of people are moving there. They are pushing up the land values, the rents that people can charge--partly because a lot of people want to live in these cities, because that is where economic prosperity is highest. It's where life is most interesting--for certain kinds of people, not everybody. And it's also places where land use is highly regulated and restricted. So, we're recording this in the middle of the aftermath of Hurricane Harvey--Houston, which has limited zoning--no zoning as far as I know-limited zoning--has not experienced the run-up in rents and housing prices that other cities experienced over the last couple of decades. But in the cities that have those restrictions, land use restrictions, building codes that are excessive to keep out competitors that have zoning that's excessive--all of--whether it's--I shouldn't say "excessive." Whether it's good or bad is a separate question. But it's harder to build a new apartment building in New York City today than it was a hundred years ago; and it's harder to do that in New York City than it is in Dayton, Ohio--be the claim. And as a result, the increase in people moving to these cities pushes up the price. Which means that those who have not chosen to move and considering it, are--first of all, it's not as appealing as it was before because it's expensive and hard to find a foothold there, as you point out, in comparison to your parents. But, it's also going to be the case--I think that a different set of people are left behind than the ones who move. And that's something we haven't confronted, I think, as a country, or talked about, even.

Philip Auerswald: Well, that's a great set of points. And I absolutely, you know, agree, and readily confess that I made two inconsistent points. I first described how the top 50 cities in the United States are capturing this disproportionate share of population growth, and then I made the point that nobody can move there.

Russ Roberts: But I knew what you were--

Philip Auerswald: So, so--

Russ Roberts: I just wanted to clarify--

Philip Auerswald: No, no, and so, so, that's exactly right. But it's simply the amount of value that is captured by landowners and, you know, rent-, you know, landlords in terms of what's created in the city. And by the way, I think the hero in all this, and I talk about this in The Code Economy, turns out to be Henry George. I mean, I think he really, you know, the 19th century U.S. economist--and he really anticipated these phenomena more clearly than anybody. And also, the role of regulation that you pointed out is very significant and certainly shouldn't be underestimated in terms of the differential. I mean, you get New York, with an average home price in 2015 of $375,000. Even Los Angeles, sprawling Los Angeles, you know, $500,000 for the Los Angeles, MSA[?], whereas Dallas and Houston are down sort of $129,000, $162,000. So, so, these--Houston is an incredibly diverse place because it's been a point of entry. It's affordable relative to the largest metros.

Russ Roberts: MSA--being a Metropolitan Statistical Area.

Philip Auerswald: Metropolitan Statistical Area. Exactly. Yeah. So, but I want to also just sort of point out how extreme this phenomenon is. So, I refer to UN [United Nations] global population estimates and you know, peaking at 2050 or whatever. Well, if you look at those maps, you find that there's really only one story there, in terms of one continued population growth, and that's the African continent. If you subtract the African continent--and I just simply mean subtract it analytically. What's happening, the dynamics of the African continent in the next 30, 40 years, are different from the rest of the world because a large number of countries in the African continent have not gone through the demographic transitions most other places in the world either have or are in the midst of it. This is a decisive factor when we look at development trajectories. So, let's remove the African continent from the analysis of global population trends. And, by the way: we wouldn't need to do that if we had open borders. But we are not going to have open borders in the next 30, 40 years. We're not moving in that direction. So, we can analytically sort of safely do that. If you do that, then it turns out that all of net population globally--subtracting the sub-Saharan, the African continent--all of population growth has occurred in cities over a million. And so, cities over a million comprise about 20% of world population. So, that means that there has net depopulation through the entirety of the surface of the planet Earth, excluding the sub-Saharan African continent and the top one-million cities. So, it's not--

Russ Roberts: Cities with one million in population.

Philip Auerswald: Excuse me. Definitely not the top one million cities. The top, the top--it's about roughly 300 cities that have over, in terms of, population ranking, that have over one million people. And so, so, you know, that leaves out cities like New Orleans. I mean, these are big cities. And they are really capturing--you know, all of the population growth, all of the net population growth, and a tremendous share of the value creation. And so this divergence between rural and urban is growing ever greater. And it's not a question of plateauing. There's something sort of impolite about talking about population decline, depopulation. If you Google depopulation you will find all sorts of black helicopter theories and, you know, of the most extravagant variety. I wrote a book, the [?] book that we're now turning into a sort of full-length book with Joon Yun, president of Palo Alto Investors, and it was titled Depopulation. That's when we kind of realized this taboo about talking about population decline. But, that's the reality for a lot of the middle of the country that we were talking about. Not all of it, of course--there's huge variation from town to town. But you drive even through the Northeast, much less cycling across country, as my middle daughter did last summer, the summer of the election; and you see towns where the elementary school has closed--well, that tells you something. And it probably tells you more than any other factory relating to that town: This was a place where there enough young people to sustain an elementary school and there are not any more. And, those places are not doing well.

24:06

Russ Roberts: Yeah, and I think there is a--I just want to remind listeners they can listen to episodes with Enrico Moretti, Chris Arnade, and Tyler Cowen--we'll put up links to all those on issues related to this conversation. But, I think when people think about the urban--when they write about it; I don't know how much they are thinking about it, but when they write about this urban-rural distinction, they tend to focus on hobby horses that they want--or axes that they want to grind, to mix a bunch of metaphors. So, they'll say, globalization--so, what's happened with globalization is supposedly the rural areas have been left behind; the urban areas are doing great. Manufacturing has been hollowed out, supposedly--which it has greatly in employment, not output but certainly employment in certain areas--rural areas and medium-sized towns in the United States. And so, it's hard to know--there's some truth to that. I don't think that's the whole story. And part of what you are suggesting is, is that it's inherently destructive to the economies of small-town America and rural America when people just leave and there are just fewer people. That's part of your claim. Correct?

Philip Auerswald: Yeah. Well, that's right. I mean, people like my father, who left [?] Wisconsin in the mid-1950s. But that happens over a sustained era. And he didn't go back. I'm not going back. There's a selection process that is--of course, people do move to rural places and they will move because that's the life and the sort of values, environment, where they feel like they are most comfortable. It's not just a one-way street. But, of course, the net is to the biggest cities. But, since you have Nassim Taleb on as a frequent guest, there's no danger of being even a tenth as provocative and volatile as he is--and by the way, I'm a big fan. Big fan. But I mean, you know, I will try to ratchet up my level to at least a tenth of a Taleb.

Russ Roberts: We need a term for that, by the way. "A tenth of a Taleb" is an interesting term. Maybe it's a T. 0.5T. p>

Philip Auerswald: That may be as far as I'm capable of getting. But it is sort of like, it's either just quaint or colloquial or just depressing to listen to what passes as 95% of a public discussion of political life in this country. There's this kind of intense navel-gazing: you'd think that this sort of world of punditry, you know, was just sort of, had its head buried in its midsection and we really just cannot see, at all, the fact that this is an evident global phenomenon driven by at least these core sort of centuries' long, if not millennia' long drivers that are hidden in plain sight; that are evident when we look at the data from not just the U.S. 2016 election, but when we look at Brexit, when we look at the voting in France, which turned a different way when it comes to the revolt of the country--and when I say revolt of the country, I mean of the countryside, rural places. But you look at Erdogan in Turkey, you look at what happens when you open up the vote, have more democratic processes in a place like Turkey--this is well-known and well-understood: that the urban cores, this sort of nascent, cosmopolitan, internationalist population, lost some control to the rest of the country. That was an advance for democracy. But it was a loss for, say liberal democracy in terms of liberal values, or, I mean classical liberal, sort of this notion of process and you know, of even a set of values that I don't really want to enumerate but it's basically the urban, you know, as opposed to the rural in conflict. And we can talk about why those are different, by the way. I mean, it's a lot different to be shooting a gun in the middle of a city than it is on your own property in Wyoming. So it's not surprising people have different attitudes about the use of guns. But it's a lot different, if you are living in a city and you are rubbing elbows--you've almost got your face planted in somebody else's every single day. And, you know, they could be wearing any kind of garb from any place in the world. You have to tolerate them. I mean, diversity, tolerance of so-called diversity along whatever--I say "so-called" because there are multiple dimensions. But, whatever it is, whatever you want to call diversity, tolerance of that in a city is a necessity. It's an urban value. It's not as necessary in a rural place. It's not required. So, it's not surprising that you would have different values. But, this is not just in the United States. This is everywhere in the world. And unless we understand that it wasn't the baby boom, it was a demographic transition; we are like other countries. And, as a consequence, we are vulnerable like other countries. I mean, this also gets into the fundamental dynamics of politics and how they play out.

29:15

Russ Roberts: So, I don't really understand that. I mean, I understand a part of it which I think is really interesting--I think your identification of this as a worldwide trend. You are not the first person to make that point, obviously--it's obvious to anybody that something is going on, again, that's not usual. The world is turned upside down in many, many dimensions in the last few years. And I love your idea that it's these three trends driving that. But I don't fully understand that--and here's why. And I also don't understand your diversity point. So, London, again being a good example--I'm going to move it out the United States' context for a minute. And let's talk about Brexit--the vote to leave the European Union, which the country voted for; but there was an incredible bi-modal distribution. People in London voted to stay. People outside of London voted to go. The urban people like, seem to like the ability to move in and out of foreign countries in Europe; they seem to like the presence of immigrants, the tolerance that you are talking about. But you'd think it would go the other way. You'd think it would be the people in London--which is a very cosmopolitan city, has a wide range of people of color from all over the world in it, has a bunch of languages being spoken that you can't miss, has service people who even though they speak English speak it with a non-British accent and non-American accent because they were born in Eastern Europe or somewhere around the Mediterranean or somewhere far away. And yet, it's the people in the countryside, who don't mingle with those people, who feel like 'We're "losing our country."' Or, 'Our country is not the same as it was before'; 'The character of Britain, of England is not being preserved.' They don't even interact much with those folks, with the people they're upset about--the immigration and the people moving across borders. You'd think it would be the people in London who would be dismayed at how the city has changed. Why are the people who aren't living there dismayed? That seems weird.

Philip Auerswald: Yeah. Well, I spent one summer in Seward, Alaska. And, without getting into particulars, it doesn't seem strange to me. Proximity is not actually a factor that--and I don't[?] even want to talk about intolerance: it just habit. It's just routine. It's something that is driven by your daily life. I mean, in January, a couple of Gallup researchers, Jonathan Rothwell and Pablo Diego-Rosell published this study, and really the focal point of what they found--sorry, it was November, November of 2016. And they found exactly what you are describing: that it was, that Trump's support was sort of disproportionately in places that were, few college graduates, far from the Mexican border, within commuting zones that were sort of fairly homogenous. And so there is this inverse correlation between kind of exposure to others and, you know, this voting pattern. That's just the study, November, Gallup, cited in The New Yorker. It's not really a question of understanding why or what that is. It's just simply the fact of the division and the fact that it's repeated from country to country. I agree with you that it's not novel to say that the world is in transition. And at least some people--and I would say people like Ken Applebaum among others who have been writing about political trends in Europe for the last decade, have the right kind of lens on this, where they understand really the extent to which the political dynamic in the United States is not a unique one. But there is something, I think, that is not conventionally appreciated; and that's really what the drivers are. So, there's a lot of globalization blame in this story, a lot of sort of thinking about the hollowing out of manufacturing, in trade, and so forth. Brink Lindsey, who is my colleague at the Kauffman Foundation, some time ago, was the one who brought to my attention this nice factoid--well, fact--that from 1995 to 2005, roughly speaking--and this is when the U.S. balance of trade went through the floor; it was really the era where you really saw the resurgence or the emergence of China as a global manufacturing power--the United States lost roughly 2-3 million manufacturing jobs. China lost 10 million. And China's manufacturing employment peaked in the mid-1990s. It's been going down ever since. So, it's not like the jobs sort of fled to China. There's been a net decrease in manufacturing jobs and increased efficiency and productivity in factories and technology, you know, for decades. But that's not the core driver. The actual core driver is much more what Ricardo Hausmann and Cesar Hidalgo pointed out in their Atlas of economic geography in, you know, and an array of work around that, which is actually the stickiness of skills and capabilities in cities. And that's what I emphasize in The Code Economy. It is a total miscomprehension to think it was the opening of borders. It's the inherent boundary of skills. Now, you may say that then that that advantage is the places that connects for it[?]. But that's because we're forgetting the human and demographic dimension of mobility. And it's these, this, basically the possibility of getting near those places that have the skills, those dense, interconnected, you know, combinatorial, combinatorially sort of rich places that are the richest cities. That it's proximity to that which is really the enabler of personal betterment. And we just don't have a solution for the vast majority of the world, it's sort of surface of the world's planet, that isn't in those top 50 metros.

Russ Roberts: Explain on that point--I don't understand it, about--you started to make it about Hausmann and Hidalgo's Atlas and the city thing. Explain that again.

Philip Auerswald: Well, I mean, this is--since this is EconTalk, you know, I guess there's an opening to have just a minor digression on, you know, the economic theory piece of this. But, we have a way of thinking about production that of course then is translated into measures that are taken seriously as guides to policy and so forth and so on, like total factor productivity and the rest of it. And that's a way of thinking about production that links inputs to outputs. And the choice, basically the decision that a firm makes is the choice of inputs in order to yield sort of the maximum output given fixed inputs, or to reduce the cost of getting to a fixed level of output. So, that's the problem of production as it's been represented for about 80 years in the field of economics. Now, we know, and there has been much discussion going back to, about, Sid Winter, who wrote a tremendous article about this in 1968, going back to Harvard Simon[?], and going back to the middle of the 19th century, that there is an algorithm--there is a process, a recipe, that turns inputs to outputs. That, beneath this notion, implicit in the production function, is a recipe. Like, when you think about a literal, culinary recipe, you've got inputs, outputs, and then you've got what you do with the inputs. Now, in a world where really the processes were pretty well understood and easily copied, it was really about investment to get the capital to increase the marginal productivity of labor; that raised wages. And then you had this sort of capital-deepening story that happened around the world, where as long as you had--you know, if it was in China or the Soviet Union, forced savings due to the Socialist system, but elsewhere in the world market system that drove investment and capital--that's how you got long-term growth. Right? But, in the last 30 years, what's changed, and this is what we really need to be thinking about is what's different in the last 30 years? Not the last 4 or the last 15. But really something like the last 30--something fundamentally changed. And I believe is what that is, is the Code Algorithms took over. And we see that in terms of like the fraction of corporate value in the United States--

Russ Roberts: What's this have to do with people moving to cities?

Philip Auerswald: Well, what this has to do with people moving to cities is that--sorry, it's a long way around--is that, it's that stickiness of skills and the capabilities of production within cities that is the core of the Hausmann-Hidalgo argument. That really is as good an explanation we have of the inequality that came about in the last 30 years.

38:21

Russ Roberts: I don't understand it.

Philip Auerswald: That's the core driver.

Russ Roberts: So, what's that mean--stickiness? Stickiness of what? That it's hard to live there? That it's hard to--what?

Philip Auerswald: No, no. It's the skills and capabilities within a place. The know-how. The set of competencies to create subcomponents that are fitted into larger components. Ideas that emerge with other ideas. I mean, if you've got an aerospace industry, if you've got a biotech industry, you've got, you know, a place like Chicago that has, you know, long-standing food, agricultural--all of those sets of capabilities that mix and recombine. I mean, Martin Weitzman has a paper, a couple of papers on this in the late 1990s that were about combinatorial growth and basically how skills interact to create the possibilities for growth. I mean, in my mind, that's really the--the best paper out of the endogenous growth literature, because it really talks about how just simply the capacities within a firm. What makes Apple Computer what it is, isn't the mix of computers and human beings in their Cupertino offices or any others. It's not the capital they [?] mix. It hasn't been for decades. It's how they do what they do. And that's location-specific. And that's the dominant driver of the economy. And we have no way of representing it in economics, so we scramble around blindly looking at measures like TFP [? Total Factor Productivity?] that are, you know, built on, the constant returns production function, it comes out of the, you know, 1920s and Cobb-Douglas, and then, and brought into the literature by Solow in 1958. 1956 and 1957. And so you've got these, this sort of analytical apparatus that leaves out what is the core driver of everything on the technology side in economics. It's a big gap.

40:10

Russ Roberts: So, listeners who have heard me talk about these issues before will remember that I have a healthy skepticism about this. Healthy, in the sense that I don't have an axe to grind here. I don't have a horse in the race. I don't--I just don't--I literally don't understand the argument that says that if you'd moved Apple to other places, it couldn't have been Apple. Now, I understand that there's some sort--I'll say it differently. There's a water-cooler effect within Apple. I understand that. If you have a firm, it's great to have your employees interacting and thinking of new things. The claim of Hidalgo, and Moretti, and Tyler Cowen, the recent conversation that we had, and assume Martin Weitzman although I haven't read his papers, is that there is a water-cooler effect in the whole area. That, the mingling of ideas and interaction between workers and firms somehow has this complementarity. And I'm open to the possibility. It's just not obvious to me that it's true. I know--it seems to be true, because we look at these prosperous areas. That there's an alternative explanation I think has to be taken seriously. Which is: All of this stuff about--it just--all these critiques of the standard model of production you are talking about, capital--they falter--and many people have pointed this out for a long time. They falter because one of the types of capital that's the most important is embodied in human beings. We call it human capital. We call it education. We have terrible proxies for it, like years of education. It's silly. It's really about know-how, and as you point out, recipes. It's about understanding how things work and how to make things work better. How to improve the recipe, how to make the people more productive than they were before, besides just adding a machine. It's the way the machines interact with the people; it's the way that people come to the machines with knowledge that they already have. Etc., etc. So, I just--I'm not saying it's wrong. I'm saying it's just not obvious to me the mechanism other than the fact that it appears to be an empirical reality that there's certain areas that seem to do well. I don't know that it's obvious--let me say it a different way. It's true that cities are more prosperous than rural populations. But that can be just because the people who are in the cities are not the same as the people who live in the rural areas. It's because they have more knowledge, and because you--not just you but the people who are making these claims--are overstating the benefits of city when in fact it's just the fact that the people who live their have the highest skills.

Philip Auerswald: Right. So, presumably, you are not skeptical of the literature on firm-level learning curves.

Russ Roberts: No, that's probably true. You mean that firms learn how to do things; they can get better and better through experience.

Philip Auerswald: Exactly. We have a phenomenon, organizational learning. Not just individual learning; but there are organizations that learn better over time. And this is robust to turnover within the organization. It's not just the people, but there's something in the aggregate--

Russ Roberts: It's the culture--

Philip Auerswald: about--the culture; and there are cultural practices: we have anecdotal stories of entire industries, like for example the German chemical industry that was destroyed twice; and lock, stock, and barrel moved to England; and it came back. Right? Because it was in the practices and the people in those organizations. Those organizations had a resilience that was beyond the physical infrastructure. And it really was beyond just the people. Right? So, we believe the firm with the learning curve literature because it is the dominant regularity on the production side. It is to the production side what the demand curve is to the demand side. So, we believe the learning curve because we have no choice but to believe the learning curve because we've been documenting it for 80 years and it's still--we find it across industries, across firms. We also believe the work that Nick Bloom and John Van Reenen have been doing, mostly ignored for about 10 years and now celebrated rightly, about the dispersion of productivity levels within--firms within industries, across industries, and across countries that, simply, firms have not figured out how to do even easy things well. This is a confusing fact. But Nick Bloom, John Van Reenen--this is the most robust literature today in terms of understanding firm-level productivity. It's profoundly important. Then we have, you know, Katz and others at Brookings who have documented similar productivity differentials across cities. And so we see that it's not just the level of the firm: that there are similar productivity levels at the level, across cities. Then we have, Glaeser and others in multiple papers who find that in fact the correlation between population and productivity differentials actually doesn't hold for the bottom third. That it only holds for the top of the distribution. So, in fact, it is this kind of rich cities get richer that drives the fundamental disparities that all is anchored in divergence of capacities and capabilities at the firm level, and then at the region level.

Russ Roberts: I just--I'm just skeptical--

Philip Auerswald: So, it's not something that can be doubted.

Russ Roberts: Well, no, no. What I'm saying is--

Philip Auerswald: It's not something that can be doubted based on the facts--

Russ Roberts: Well, it can be doubted. Trust me. I can doubt it--

Philip Auerswald: No, I mean--

Russ Roberts: The part I'm doubting is not the empirical reality that some cities are "richer." I'll take the quotes out. What is not doubted is that some cities have higher levels of average income than others. That's a fact--

Philip Auerswald: Point Number One.

Russ Roberts: The question is: Is that because those cities are, say, denser? Which is part of the claim. Is it because those cities have pulled in all the people like the people that need to interact? Or is it just because they attract really smart people? That's what's not clear. That's all. And I want to--

Philip Auerswald: Well, [?]--

Russ Roberts: And I'll let you get the last word, but then I want to move on, because--enough on this. But, react.

Philip Auerswald: Well, fair enough. I mean, obviously, the whole point of the scientific method is to be skeptical, and so if we don't have skepticism, we don't have science. So, it absolutely can be doubted. What I'm saying is that we have a body of learning about divergence of productivity levels among places, that just the technology side of these three causes that we talked about in the beginning. It interacts with urbanization; and those demographics are a third, equally important. So, but my insistence on this point--and obviously I'm insistence[?]-inspired and wrote an entire book about it--is that really, without understanding this notion of the recipe of who can run a better restaurant than somebody else, and why, and how that endures, and how we have celebrity chefs, and how even in something like cooking which has been going on for as long as we have been human beings, you have this tremendous divergence. This is not something that can be explained by human capital alone. And that will--that's my conjecture that I believe is pretty robust. When we look at the way in which the similar type of phenomena are replicated across scales. And I think it takes a rather extreme theory to say that it only goes up to the firm scale, but it doesn't go to a regional scale.

Russ Roberts: But a reason it wouldn't go to a regional scale is there's no water-cooler--it's not obvious there's a water cooler to mingle and interact with. I mean, is it the bar? Is it the local nightclub? Is it--the claim, now, I'm willing to admit, there is a--all I'm really objecting to, here, is that the people who make these claims never seem to specify the mechanism. They observe an empirical reality--excuse me--an empirical regularity. And they don't really have a mechanism for how this takes place. There are such possible mechanisms. It could be, for example, that the venture capitalists in Silicon Valley are driving a lot of the inter-firm movement and efficiencies of human capital being allocated better, there, perhaps. Or the fact that people get stimulated by working at one company and can quickly move to another--which they might not be able to do if they were in Poughkeepsie [NY] or somewhere else far away. By the way: There is a certain irony about all of this, which is that the technology digital revolution is what let me work from my bedroom, which I'm doing right now--I'm working in my office downstairs. I'm not sitting at the Hoover Institution. I'm not mingling with you here in the D.C. area even though I used to be at George Mason. And somehow we are having this conversation across distance. And we're stimulating[?] our ideas against each other. And yet, these arguments are that you have to be physically near people. Now, physical matters. Obviously there are costs of moving. There's costs of adapting. There's cultural differences across areas that are difficult to change. So, all those things are possible. I just think this, so-called complementarity theory or nonlinearity theory or whatever you want to call it, hasn't really gotten to the bottom of it, of what's going on.

Philip Auerswald: Well, I know you want to just close this off, but I want to give you one mechanism.

Russ Roberts: Yeah, go ahead.

Philip Auerswald: Right? And it's the coffee house. Okay? I spend a lot of my time in coffee houses. And, so there's this great article in the New York Times about three years ago, four years ago, and it was about the 17th century coffee houses. I mean, Adam Smith wrote The Wealth of Nations in a coffee house. Right? And coffee houses have, for centuries been the mixing and mingling gaps[?]. Now, the mixing and mingling graphs[?]. We also have on top of that now co-working spaces. And we have, you know, exercises [?] effect. I would say that the physical workplace--there is not--there is no water cooler. I mean, I don't get water at a water cooler. I don't even know what the water cooler is. But I know what coffee is. And I spend a lot of time in coffee shops. And it's a place that is a very dynamic center of interchange. Right? And people pay for access to those environments. And they pay a lot. And you can think about how people, you know, just in terms of rent differentials, what people are willing to pay to be in a Brooklyn as opposed to a Dayton. And they are getting something for that. So, I think the market is revealing something there, when we see the differentials between what people are willing to pay in different places.

50:08

Russ Roberts: Well, I think they are getting a lot of things at those different places that have nothing to do with productivity. They are getting more cultural life; they are getting better restaurants. They are getting better weather. They are getting access to the mountains; they are getting access to the beach-- Whatever it is--

Philip Auerswald: Right--

Russ Roberts: A view of Mount Rainier on a clear day in Seattle. I want to propose--let me propose--you can come back and answer it any time you want.

Philip Auerswald: Yeah.

Russ Roberts: But, let me propose a different explanation for the populist phenomenon that is related to your drivers but in a different way than usually suggested, and maybe explains some of it. I would argue that the world is changing at an increasingly quick pace. That economic change is changing at an increasingly quick pace. I've pointed out many times; I don't think our data are very good at identifying this, particularly in measuring, say, Consumer Prices, because we don't control for quality; and quality is getting increasingly better at a faster and faster rate. Say, on how much my phone can do, or my television, and so on. So, I think a lot of our measurement is totally off. And, I would argue that there are differences in how well people can cope with these changes. I'm lucky. I happen to have the idea to get into podcasting at a time when podcasting is growing. If I'd gotten into this idea in 1920, I'd have tried to get my own radio show, and I probably would have failed. None of this, whatever talent I have at this business, would have led to anything. So, I'm not suggesting that some of these abilities that deal with change are unique to certain people and not to others. But certainly change helps some people and hurts others. And some people are comfortable with it. Some people are uncomfortable with it. So, if you've been living in a, say, rural environment, one of the obvious things about a rural environment--it's pretty static. What changed in the 20th century that was not static was the farm. So, the farm changed dramatically over the first half of the 20th century: they all got a lot bigger and that meant that a lot of people who were living in rural areas couldn't make a living any more--couldn't make a good living--and they moved to cities because that was where they could do better. I think what's going on now is that, partly for what you are identifying, I'm open to the possibility that the decreasing density of non-urban areas--not just rural areas, but non-urban areas, small towns--that's hurt them economically. There are gains from increased density. So, those areas that have lost density, they are just less--fewer things going on. And so, their lives are less appealing, less fun. Now, in the old days they'd move to the city. But as we've been talking--it's gotten more expensive to move there. And a lot of people do move. But, the ones who are left behind are in an economic landscape that's less pleasant than it used to be. And this is happening all over the world. I don't think it's just globalization. I think some of it is the urbanization, as you point out. Some of it is the application of technology to economic processes, which has sped it up. So, instead of just, as you get older, things are a little more difficult, they are a lot more difficult. People are frustrated that things they used to rely on socially, culturally, economically have disappeared. And I think that's a big part of what's driving the populace movement around the world. And I don't think it's inconsistent with what you are saying. It's just a variation on it.

Philip Auerswald: No--I mean--so, there appears to be, from just this slogan for the election of our current President, a sense of something that was lost that you want to re-capture.

Russ Roberts: Yup.

Philip Auerswald: And you see that in [?]. You see it in France. As I said, my mother is from Tunisia; my relatives all live in France now. So, I follow the French political dynamic, at least to some extent. It's not that different. And so, there was a sense of something lost. But, if you look at--you know, the French post-War restrictions--there's [? Un Eglise glorieux ?]--in the sort of sense of like there was a kind of--or the mid-1960s in the United States. I mean, there's nothing more corrosive to public debate in this country, or in France for that matter, or in England. The focal point may change. In England it may be the 1920s or the 1930s, or earlier. But here, there's nothing more corrosive than focusing on the 1960s as the point of reference. And unfortunately that's what an outsized share of political discussion does. And that's what, at least for people who are in their 60s, 70s, 80s--who, you know, is a natural focal point in terms of their own recollections: that there was a better time that they've lost. Right? Now, in the United States we only got the prosperities of the 1950s, 1960s to the extent that we did as a consequence of a world war that destroyed--that killed 60 million people and destroyed every production center in the world except for the United States. And that gave us this wave of immigration, including so many of the world's most talented people. And anybody who could get to the United States did, for an interval. And then we also had, you know, world markets that were sort of available to U.S. exporters without any kind of significant competition for decades. And so this was this incredible boost. And sort of, it framed the notion of what the norm is for a generation. And the entire baby-boom generation is crippled by this historical accident that holds up the aftermath of a world war that kills 60 million people as some sort of like wonderful norm that we--

Russ Roberts: golden age--

Philip Auerswald: will return to. It's the golden age. Yeah. I mean, it is the most, it is the most--so, anything--if you use the metrics of the 20th century and you compare now to the 1960s, we will lose on every dimension. And you can be depressed for as long as you want to be. Right? And if you think about places where population is growing and there's dynamism and there's the frontier, are different from places where population is shrinking, people are in pain, you've got the farm industry pushing oxycontin down their throats like they did in West Virginia and elsewhere, and the entire story you had with Sam Quinones on your show, which was terrific. So, I mean: Yeah, there is real misery, and there's a real sense of loss. But, it simply doesn't hold up if we think, again, not only in 30-, 40-year intervals and not only in terms of the United States. For most of the world, of course, the last 30 years has been fantastic. It has been probably the best era in human history. It's just the Rich Six that has been--and really, rural places in the Rich Six that have been punished. And they've been punished severely for doing nothing but staying put.

Russ Roberts: Yeah; it's a great observation. I just want to reiterate that. China and India have undergone one of the most--there's no parallel to it in human history, right, to have hundreds of millions of people improve their lives dramatically is a glorious thing. And I think that's to be celebrated. And your point is, that at the same time, they have not [?] to the richest countries. The richest countries are overall doing still phenomenally well. It's a subset of the people in those rich countries who feel left out. And are left out.

57:39

Russ Roberts: And, I think--let's move on to what might be done to make that better. For me, the obvious thing is to reduce the restrictive nature of land use in American cities. But that's politically--that's kind of a non-starter. The people who are already there have the political power to keep it the way it is. They want to keep it the way it is. It's in their self-interest to keep it the way it is. So, it's not obvious that's going to change. You know, what's happening in the Bay Area, which is so weird and nonfunctional--I summer in Palo Alto, which is unimaginably expensive to spend any time there. And, what's happened is that people are living farther and farther away to come work in those cities that are thriving. They are commuting from Gilroy, which is, you know, 40 minutes from Palo Alto, an hour or something south of San Francisco. But that's where young people are moving to try to start their life. And facing these very long commutes. Of course, one argument would be the autonomous vehicle might make those longer commutes a little more pleasant, which just means that it will push the places you can commute from even farther away. But, let's talk about--

Philip Auerswald: Have you[?]--I saw that letter from a--Kate Downing, who is the Housing Commission in Palo Alto?

Russ Roberts: No. [?] or I may have forgotten [?]

Philip Auerswald: Anyway, it was all about this.

Russ Roberts: Oh, yeah, yeah. I did see it. Complaining, upset about it.

Philip Auerswald: But for years, home values have gone from $1.25 million, one and a quarter million, to $2.5 million in 3 years. It is, I mean, these are real phenomena. But you talked about, like, what are the solutions?

Russ Roberts: Yeah, let's start there. And you--

Philip Auerswald: I completely agree with you on land use restrictions. In fact, there's a very simple one. And it could happen in the next 6 months; and we have the right political configuration to make it happens--which is to lift height restrictions in the District of Columbia. It's just one city. But it does kind of, you know, create some sort of entry point for the mid-Atlantic. And, the city of Washington, D.C. is really unique in the world in that it has banked billions of dollars of assets in these sort of falsely-conceived, you know, height restrictions. From another era. And I'm not--I always--I was born in D.C., I lived in D.C. a lot of my life, I like Washington, D.C., I like the way it looks and feels. But, it is--it is terrible from an equity standpoint. It's terrible from a standpoint of long-term prospects of the city. And, it's because this is the nation's capital, it's terrible from the standpoint of the long-term prospects of the United States. [More to come, 1:00:12]

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The Rich Get Richer...tag:www.econtalk.org,2017://2.153242017-09-20T18:24:13Z2017-09-20T20:15:48Z But is that a bad thing? That may be the central question explored in this week's EconTalk episode with UC Berkeley's Gabriel Zucman. Working with Thomas Piketty and Emmanuel Saez, Zucman explored national income accounts to look for trends...Amy Willishttp://www.econlib.org But is that a bad thing? That may be the central question explored in this week's EconTalk episode with UC Berkeley's Gabriel Zucman. Working with Thomas Piketty and Emmanuel Saez, Zucman explored national income accounts to look for trends in income inequality in the United States since 1980.Their results suggest that the bottom 50% of Americans have seen no growth in income, while a disproportionate share of growth has accrued to the top 1%. How robust are these results, and what policy implications might be suggested? And how does income inequality in America compare to that in other nations? Do you feel richer than you did in the 80s? Share your thoughts with us today... We always love to hear from you.

1. In terms of income inequality, how are average growth rates misleading about the real state of the economy, according to Zucman?

2. How does Zucman's analysis differ from previous attempts to measure income inequality? What are the weaknesses of using tax data for such purpose? How might a cross-sectional approach yield different results regarding income inequality?

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3. What four causes does Zucman suggest have brought about this combination of stagnant income growth for the bottom 50% of Americans and increased income inequality? Which does Roberts give the most credence to, and why? Which do you find most explanatory, and why? Least explanatory?

4. While Zucman finds that the lower and middle classes have not experienced any income growth over the past three decades, Roberts counters that even so, they are still much better off than in 1980. How can he make that claim? To what extent does Roberts convince you?

5. Some, like John Tamny in this piece for Law & Liberty, suggest that there are indeed positive benefits to inequality. What might these be, and to what extent do you accept this argument? At what point does emulation (which Adam Smith saw a positive role for) shift from being aspirational to confrontational?

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Gabriel Zucman on Inequality, Growth, and Distributional National Accountstag:www.econtalk.org,2017://2.153142017-09-18T10:30:00Z2017-09-21T14:36:39Z Gabriel Zucman of the University of California, Berkeley talks with EconTalk host Russ Roberts about his research on inequality and the distribution of income in the United States over the last 35 years. Zucman finds that there has been...Russell Robertshttp://www.econtalk.orgGabriel Zucman of the University of California, Berkeley talks with EconTalk host Russ Roberts about his research on inequality and the distribution of income in the United States over the last 35 years. Zucman finds that there has been no change in income for the bottom half of the income distribution over this time period with large gains going to the top 1%. The conversation explores the robustness of this result to various assumptions and possible explanations for the findings.

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0:33

Intro. [Recording date: September 7, 2017.]

Russ Roberts: Our topic for today is Gabriel Zucman's recent paper with Emmanuel Saez and Thomas Piketty, "Distributional National Accounts: Methods and Estimates for the United States", which has received a great deal of attention in the popular press and among economists.... So, it's a very provocative and complicated paper. We're going to try to do two things today among a few others, but we're going to try to give listeners an idea of what the paper finds, and then how such a finding is actually constructed using data. So, some of the background of how this kind of empirical work is done. So, let's start with some of the key findings of the paper. In a recent treatment for the average person, not for an economists, which you wrote up--we'll link to that write-up--you suggest there are three key findings. What are they?

Gabriel Zucman: So, what we are trying to do is research to impute income growth for each group of the population with a way that's consistent with macroeconomic growth. And so, there are indeed three big findings. So, the Number 1 finding is that you had some growth in the United States since 1980--that is, the average income per adult has increased about 60% since 1980--

Russ Roberts: And including--I just want to make one--this is really important: This isn't just earnings. This is all forms of income: taxes, transfers, right?

Gabriel Zucman: This is all income as recorded in the National Accounts. So, that is the headline figure that we hear when we talk about GDP [Gross National Product] growth--about the macroeconomic growth rate of the country. So, if you compute macroeconomic growth per adult, what you get is this number of 61% increase in total income since 1980. But the Number 1 finding is that income growth has been very unequal. So, if you look at income growth for the bottom 50% of the distribution, before taxes and transfers--so, before any form of government intervention--you've had zero growth for the bottom 50%. So, for half of the population, they've been completely shut out of economic growth. Their income in real terms has not increased. The second finding we have is that, you know, by contrast, at the top of the distribution there has been a lot of growth. [?] at the top 1%, their income has been multiplied by 3 in real terms since 1980. To give a sense of how heterogeneous growth has been in the United States, so, we can express these numbers in terms of real growth rates per year. So, when I say that average income has increased 60% since 1980, that's equivalent to an annual real growth rate of 1.4%. So, that's the average in the United States. What we find is that, for the vast, vast majority of the population, the growth that they've experienced has been much less than 1.4% per year. In fact, for the bottom 88 percentiles, or for 88% of the population, income has grown less than 1.4% per year. So, only for the top 12% that income has grown at above 1.4%. And among that group, it's really only in the top 1% and top 0.1 and top 0.001% that you see high growth rates of 3, 4, 5% per year. And so, that's important, because some people have a view that what is happening in the United States is that, let's say, the top quintile--so, the top 20%--has pulled off from the rest of the economy. And that's not really what we find. We find that rising inequality in the United States is really very much a story about the top 1%. So, another finding we have is: How do these reserves[research?] change when you take into account taxes and transfers? So, the effect of government intervention. When [?] of government estimates of inequality in the United States is that they don't take properly into account of the role of taxes and transfers; and all the numbers that I've mentioned up until now were about pre-tax- and transfer-income. Now, after taxes and transfers, and when you take into account all forms of taxes--at the Federal level, at the state and local level--and all forms of transfers--whether monetary transfers or in-kind transfers or public goods spending--what we find is that government distribution has made growth slightly more equitable. But only slightly so. That is, if you get back to this bottom 50% of the distribution that has experienced zero growth pre-tax and transfer, after taxes and transfers its income has grown a little bit. It has increased by about 20% since 1980. That is still much, much less than the average growth of 60%, and of course much less than growth at the top of the distribution. So, our conclusion here is that, despite important changes in government transfers and the expansion of certain important programs like Medicare and Medicaid, that has not been enough to significantly lift the income of working class Americans--so the bottom 50%. And, the last finding that we have, which I think is [?] very interesting, is that what we are currently trying to do now is compute similar statistics in other countries. And we've done that in France. And we can compare, let's say, the income growth rates for the bottom 50% in France and in the United States. And the trajectory has been very different. In 1980, the bottom 50% income earners used to be about 10% richer in the United States than France. But, what has happened is that in France, since 1980, bottom 50% incomes have continued to grow at roughly the same rate as macroeconomic growth in France, when the United States has completely stagnated. As a result, now, the bottom 50% in France is significantly richer--has more income--than in the United States. And that is before taxes and transfers. And that, what makes this reason[research?] particularly spectacular--I'm not talking about the generous welfare--French welfare state. That's not what's driving our results. Before tax and transfers. So looking just at market income, the bottom half of the distribution, half of the population now does better in France than in the United States. And that's our last main finding.

8:53

Russ Roberts: So, listeners will not be surprised that I'm skeptical of these findings. Right? And--I have to say--I find them hard to believe. So, I'm going to give you a chance to convince me, over the next 50 or so minutes. But let's start with how you constructed these. So, to give listeners a little bit of background: How would you begin to use the National Income Accounts? Let me say it differently. You might--you might, listeners, you might understand--you might hear that capital's share has gone up--or down--compared to labor. Or, 'Men and women have had different wages and growth rates of wages' over a particular time period. But, Gabriel, what you are I think trying to do here is say, 'When GDP grew 3.2% in such-and-such a year, how much of that went to the bottom quintile--the 20% who were the poorest in the United States? How much went to the top 1%?' That's a very hard task. So, how would you begin? How do you begin to make the assumptions that you need to do to apportion those gains to different strata of the income distribution? And let me know if that's the right question.

Gabriel Zucman: Yeah. That's a great question. That's exactly what we're trying to do. What we're trying to do is to bridge the gap between the study of macroeconomic growth, where people use National Accounts data, and the study of inequality, where people use tax data and survey data to study the distribution of income or the distribution of wealth. The problem is that there is a large gap between the total income that you see in the survey and tax data, and total macroeconomic income--total GDP or National Income. And that's a problem, because then it makes it hard to decompose macroeconomic growth by income [?]--to have just growth statistics for each fractile of the income distribution, for each growth of the income distribution that add up to the headline GDP growth number. So, the way that we try to bridge this gap is by combining National Accounts tax data and survey data. So, they all have strengths and weaknesses. But if you combine them--and you can try to approximate the distribution of Total National Income, as we call it in the National Accounts. And, I want to stress that this, what we've done, in my view, is very much a prototype. So, there are uncertainties. Could be improved in many ways, as more data become available, as methods are improved. But I think the objective is worthwhile. That is, it's important to try to not only measure growth but be able to say, 'Here is how growth looks like for people like you.' So, our starting point is: National Income, as recorded in National Accounts. So, what is National Income? That's GDP, Gross Domestic Product, minus capital depreciation--which is not an income for anybody. Plus the net income that the United States receives from abroad--so typically dividends and interest that the United States receives from foreign countries, minus and interest like based in foreign countries. So, it's very close to GDP. And that's our starting point. And then, what we try to do is to allocate this big total to which group of the population. So, some from the income of, are well-captured in tax data. Typically, the dividends and interest income that wealthy individuals earn--tax data of a critical source of information to capture that, because all rich people have to submit a tax return. And, that's how we know how that form of income is distributed. Wage income, as well: Tax income does a very good job there. For other forms of income, you need to look at survey data. Typically, transfers, a lot of transfers, are not taxable and so don't have to be reported on tax returns; and so you need to look at survey data. You need to do [?] CPS[?] [Child Protective Services? More probably in this context: CPS=Current Population Survey--Econlib Ed.] in the United States, the current population Survey. And you have a third category of income that you see, neither see in tax data nor in survey data. Things like, corporate retained earnings, for instance, which have increased a lot since the Great Recession. Then you need to impute them. So, what we do is, in that research is pretty technical. We try to explain, for each income category, how we capture those income categories. Tax data[?], so there is all imputation. We try to be very explicit about the tax [?] imputations[?] that we are making, when there is no readily available source of information. And we try to investigate what happens when we impute income in different ways. And broadly speaking, the research don't change much for the simple reason that the rising inequality in the United States--the trends are so massive that even small deviations--you know, changing imputations from some capital reserve income doesn't affect these big trends, which was already very visible in survey data or [?] data. So, that's a broad methodology.

15:05

Russ Roberts: So, let's start with--I am fascinated by the claim that the bottom 50% has had no gains in economic benefit--certainly from market-based economic benefit. So, again, we might want to distinguish between inequality or gains from market-based results. Which could be your investments; It could be your salary, or wages, your fringe benefits. And then there's a second thing you would look at, which would be: Well, what about your taxes? And what about transfers? Government benefits? You might be eligible for and receive unemployment insurance, food stamps, Social Security, etc.? So, to me the most dramatic claim, and the one that I'm most skeptical of, is the idea that the bottom 50% had zero pre-tax and transfer. That is--ignore tax and transfer for a minute. Just look at the outcomes from what people earned and invested and gained, or lost. And that is stagnant. For a 34-year period during which, economic growth, as you say, was quite substantial: 60% per adult, over the--an increase of 60% per adult. It's saying that the bottom 50% got none of that. So that's a very dramatic claim. So, my first question is: What does--and just a clarifying question: Does the additional of the National Income approach or the National Income accounts data affect that very much? Because that bottom 50%--they are not getting a big part of corporate-retained earnings, I assume, or other things that might show up in the National Accounts that aren't in taxes or survey data? America I right in that?

Gabriel Zucman: Yeah. You are absolutely right. I mean, the bottom 50%, it's actually relatively easy to observe their income, because the vast, vast majority of their--all of their income, pre-tax and transfer, it's labor income. It's wages and salaries and second-employment[?] income. And that income is typically very well-recorded by the tax data[?]. And the survey data. So, this trend, that there has been zero growth in pre-tax income for about half of the distribution, you could see it already pretty well in tax and survey data. Where tax and survey data have limitations, important limitations, is not really for wage income or labor income, probably speaking. It's for capital income--

Russ Roberts: right--

Gabriel Zucman: Because, if you look at the flow of macroeconomic capital income--so the capital share that macroeconomists study and they find it's relatively big, about 25, 30% of National Income and they find it's [?] in the United States and in many other countries. About two-thirds of this macroeconomic flow of capital income, you don't see it in tax and survey data. In tax[?] they tell you, only see one third of total capital income because the majority of economic capital income is actually tax-exempt. That includes corporate retained earnings, imputed rents for home owners, a number of taxes like the corporate tax and property taxes. And a big flow of dividends and interest that's paid to pension funds. All this, big flow of capital income, it's part of economic capital income, but you don't see it in tax data. Now, capital income tends to be more concentrated than labor income. Which means that actually with tax data, ordinarily you can't do too good a job at studying the rich. That's kind of--you know, a paradox, because people started using taxes--they started studying the rich. But if you think more about it, there is a [?] two thirds of capital income that all go[?] it goes to the top. So, our imputations are going to play some role for the dynamic of income at the top and for the composition of income at the top. But, for the bottom 50%, they are not playing any significant role.

19:54

Russ Roberts: So, let's start with that. Let's just start with the bottom 50%. So, I want to start by saying something that I think sounds like it's impossible. But, I think it's a very important truth. And I just want to get your reaction to it. When you say that the bottom 50% have no gains in income between 1980 and 2014, that does not mean, that does not rule out the fact that, if you went and looked at people in 1980 and you followed them throughout time--in particular, if you took 25-year-olds in 1980 and followed them till they were 60, 59, if I got the years right, in 2014--you are not saying that none of those people had any growth. Because obviously millions of them did. Millions of them are better off in 2014 than they were in 1980. Right?

Gabriel Zucman: That's correct. So, the approach that we have in this research is, let's say, a cross-sectional approach, where this means very simply is that we look at the distribution of income, year after year. We are not trying to photo[?] people over time. Which would be very interesting and important and hard to do. But in this research is very much a first step. We don't follow people over time. Now, is it likely that if you are able to follow people over time you would find a significant amount of growth for the bottom 50%? I'm a bit skeptical. For the following reason. What we tried to do, what we are doing as research is we compute income distributions by age groups, so we can look at the bottom 50% of income earners, age 20-30. 30-40. 40-50. And, when you do that, you see, basically, no growth for the bottom 50% within each age group. And so that suggests that even if, of course, you know, over the life cycle, people's income and wages change, there has been this huge stagnation of wages for working class America at all age levels. Such that, it's unlikely that, even if you were able to follow people over time you would see a lot of income growth. And, you know, more generally, there is no indication that there is a lot of mobility in or out of the bottom 50%. There is no indication that people in the bottom 50% of [?], to move, say, to the top 10% or that they move to the top 1%. The Social Security data that are used to study these questions where you can follow people over time are very clear on that. There is a lot actually of persistence in income over time. So, if you are in the bottom 50% of the distribution at some point, you are still very likely to be in the bottom 50% next year or two years after. But, you know, we need more research on that question. And it's certainly a next step for research.

23:23

Russ Roberts: The reason it's important, more generally, is because: If, to take an example, the United States had a lot of low-skill immigrants come into the country between 1980 and 2014--which, there's a decent number of. Obviously it's a bunch. But there's also some high-skilled immigrants who came, which complicates it. But, if you had low-skilled-only immigrants who came, then what you would observe is--you might observe that the average wage level in the United States could go down, but every person who was already here before the immigration are better off. And so, the average growth rate for the bottom 50% in that situation could be very misleading about the state of the economy. Could be just a composition effect.

Gabriel Zucman: Right.

Russ Roberts: So, that's one issue. Now, when people do follow the same people over time, they do find very different levels of growth. And in fact, I mean, it's shocking. When I talk about these numbers, people always assume they can't be true, because we all know so many things about the income distribution. But I don't understand how these numbers can be so different. So, for example, Gerald Auten has done work with colleagues--was in the National Tax Journal--I'm just going to quote these numbers, because they are so striking. He looked at people aged 35-40 in 1987--so he's going to look at a 20-year period, 1987-2007. It doesn't exactly overlap with 1980-2014. But, it's a 20-year piece of your time period. He finds--they find--that, shockingly, the poorest people had the biggest gains in income. The lowest quintile over that 20-year period--that is, you started, you are 35 years old in 1987, 20 years later, the people in the bottom quintile had doubled their income. They had 100% growth. That's the change in median within that quintile. For the next quintile, it's 42%. For the next, it's 27%. So, the three lowest--the median income within the three, the bottom 60%, went up by 27, 42, and 100%. The 4th highest quintile only went up went up 11, and a 5th only went up 5%. So the largest gains went to the poorest people. And that's totally different than the standard finding that people claim about that the average person, the median person, the bottom 50% are making no progress. What do you think is different about their results relative to yours?

Gabriel Zucman: I think there are many differences. So, one thing is: What's the income that you are looking at? Are you looking at pre-tax income? Are you including some of many forms of government transfers? What we are trying to do in our research is to add a really clear distinction between what is income before any form of government intervention--what we call pre-tax income, and income after you include after you include all forms of government taxes and transfers. Another difference is: How do you deal with changes in household size? Changes in marriage rates and divorce rates? A lot of the analysis in inequality, you know, is conducted at the household level, which, you know, can be a problem if household size changes a lot. Which has happened in the United States. So, what we try to do in our research is to address that issue by looking at income per adult, where we split income, the income of married couples, 50-50 between each spouse. So, to have at least consistent unit of observation over time that's not affected by changes in household size. And most importantly, what we've tried to do is to have members that add up to total GDP growth and to total National Income. And so, if you believe that income has grown a lot at the bottom of the distribution, it has to be the case that it has grown a lot less at the top of the distribution than what we estimate. That's contradicted by a huge and overwhelmingly large set of evidence from [tanzlita?] in particular. So, again, I think more work needs to be done to better study changes in income when you follow people over time. But, reading that I do after most recent studies that follow the entire population of working age Americans using Social Security data, even when you do that, when you follow people over time, you see a huge increase in lifetime inequality. And the point about immigration--I mean, it might play a role. I'm not sure, though, that it explains a lot of what is going on. Because, look at Europe. Before the Great Recession, the Crisis of 2008 and 2009, there was actually more immigration in the EU [European Union] than in the United States. That has changed since the Great Recession. But if you look at the 2000-2009 period, that's, that's, that's true. And, 11 developed[?] countries, that includes France, Germany, Scandinavian countries, where immigration was much higher than in the United States. And yet, we don't see the type of stagnation involving 50% incomes that we observe in the United States. Getting back to the case of France, we see that the bottom 50% has been growing at roughly the same percent as the same economy. Looking at Scandinavian countries, is even more spectacular. There is much more inequality--there is much more equality there, in Scandinavian countries as in the United States. And growth has been much more equitably distributed than in the United States. Despite higher immigration as than in the United States. So, I think what's more important to--as an explanatory factor for understanding what is happening in the United States is not low-skill immigration, but it's a number of changes to policy. The decline in the real Federal minimum wage since the late 1960s or 1970s. The decline in the role of unions. More broadly speaking, the decline in the bargaining power of labor. Very unequal access to higher education. All of these things, I think, have contributed to the stagnation of the bottom 50% income in the United States.

30:58

Russ Roberts: Okay, we're going to come back to those because those are really interesting and provocative. I disagree with three of them; but I agree with one of them. So, that's pretty good. I just want to make a clarifying point on immigration and then I want to ask you about the family structure issue. So, I agree with you on immigration: I don't think that it's important. I just gave that as an example of how misleading it could be when you look at different snapshots over time because they are not the same people. I think it's very interesting that all--not true any more--but, for a while all of the studies that followed the same people over time showed large gains for the poorest people. That's true in the Panel Study of Income Dynamics [PSID] that people have analyzed, which follows people over time since 1970s.

Gabriel Zucman: That may be true in some studies that use survey data, and PSID, but that's not true in the studies that use the population-wide Social Security data.

Russ Roberts: The recent ones that came out. But the Auten study that I mentioned--we'll put a link up to it--the Auten study that I mentioned is actually using tax returns and it's quite exhaustive; it's an enormous sample of the entire universe of tax returns that showed the largest gains for the bottom. And not just the largest gains--quite large, dramatically larger gains. But the question I want to focus--I want to [?] for a minute before we get to the causation and speculation about what are the explanations for this: Let's talk about households. And you make a very good point, which, because it drives me crazy: There's been a huge change in household structure in the United States over the last 35, 40 years. It goes back to the 1970s when the divorce rate in the United States started to rise very, very rapidly. And it rose very disproportionately by education. So, there was a big increase in divorce for the people with the least education. People with the highest education tended not to divorce. And I think--it's either in your results or in others I've read--among the top 1%, the percent that's married is very high, remains very high. Whereas in the rest of the population it's fallen dramatically--but particularly dramatically among low-skilled, low-education workers. So, what we've seen in the United States since the 1970s is an increase in households that's not due to population growth, but it's due to either divorce or people not marrying at all. And, that that increase in households has not been spread equally across the income distribution--it's disproportionately found in the lower half. Does that--when you apportion family income, household income, equally between husband and wife, do you think you--are you controlling for that?

Gabriel Zucman: We have a way, which is not the only way--and we consider other ways to control for that--which is to always conduct the analysis at the adult individual level. Then the question becomes: How do you split income within married couples? And, there's a lot of research on that, and sharing rules among couples, and very interesting research in this area. But it's hard to have long time series for empirical sharing rules. So, in our benchmark series, what we do is, we are agnostic and we just say: Income is split equally. Now, with the data that we have and that we are going to make online, the micro-files[?] that we are going to make online relatively soon, you can experiment with other sharing rules and you can say, 'Okay, husbands [?] take a greater fraction of the comparison[?] of income, or a smaller fraction; this has changed over time.' But, that's the way that we address this issue. We think that if you want to be consistent, if you want to create series that are consistent with macroeconomic growth, which is typically expressed in terms of per adult income, you need to study the distribution of per-adult income. And so I think that's progress compared to the studies that look at household incomes and sometimes use no equivalence scales to individualize[?] income, because we searched studies: You can't be consistent with macroeconomic growth. Your country[?] decompose macroeconomic growth across social groups.

Russ Roberts: I want to add that, when I raised the data findings of the paper by Auten, et al, in the National Tax Journal, you correctly asked the question, made the observation it depends on what kind of income you are looking at. They were, I think, looking at after-tax, after-transfer; so they find large effects. They may not have found those same effects if they had narrowed it down to labor income. But, it does also challenge your conclusion that taxes and transfers don't have a big effect. And Auten has that other paper with Splinter from 2016 where they find large effects in reductions of--they find much smaller growth in inequality when you include government taxes and transfers. What do you think explains that difference relative to yours? Have you looked at it?

Gabriel Zucman: Yes, yes; we've looked at these carefully. And there are a number of differences. One big difference is--we tried, and we do distribute 100% of National Income, and they don't. Another difference is, when you [?] pre-tax and transfer income, whereas they look at income concepts which are more mixed. So it's really in the area of data[?] that you mentioned, it would be income including some forms of government transfer, but not excluding taxes, for instance. Now, we know, taxes for the bottom 50%, people don't know that but they've increased quite a lot--

Russ Roberts: Social Security--payroll taxes--

Gabriel Zucman: because of payroll taxes. Exactly. They've increased a lot. The overall tax system in the United States, if you compute average tax rates by income group, taking into account all taxes at all levels of government, you find that the top 1% average tax rate is a bit higher than the average macroeconomic tax rate in the United States, which is 30%. You find that the bottom 50% average tax rate is a bit below 30%. But the difference is very small. That is, you know, all together, the tax system in the United States is barely progressive. It's close to a flat tax where everybody almost pays 30% of their income. And that's a big change compared to the 1960s and 1970s where the top 1% average tax rate was significantly higher and bigger than the average tax rate; and the tax rate for the bottom 50% was significantly lower, below the average tax rate. And so, you know, it's very important to be consistent. You can't just look at transfers but forget about taxes, and vice versa.

Russ Roberts: Yep; I agree.

Gabriel Zucman: So, that explains a lot of the differences.

38:48

Russ Roberts: Let's talk about the possible explanations. The last thing I want to add is that consumption data also, to me, casts some doubt on the claim that the bottom 50% have made no change in their economic wellbeing since 1980 or a very small change. The bottom 20% has much greater access, and of course, a fortiori, the bottom 50% has a much greater access to a huge range of consumer goods. Cellphones, washing machines, air conditioning, cars; houses have gotten larger, the median house is larger, it's not just houses at the highest end. So, to me, that's also a challenge to the finding that there's been no gain. I was alive in 1980--I think I'm older than you are, than you were then--were you born in 1980? But I was an adult; so I remember what 1980 looked like. And the world has changed a lot. It's a lot richer; there's a lot more stuff. And it's not just going to the top 1% or the top 10%. It's all over the place. It's in every Walmart--I'm not saying it's particularly important or good. But it's hard to understand the claim that there's no gain for that group. This is not a very sophisticated argument. It's a sniff test.

Gabriel Zucman: Well, I hear this argument, yeah. The thing is that, when you look at the macroeconomic data--so, let's forget about distributions for a second--is it the case that there's been a lot of growth in the United States since 1980? In the macro data, the answer frankly is, 'Not really.' Average income per adult, in real terms, has increased only 1.4% per year since 1980. That's what the macro data tell you. Now, maybe macroeconomic statistics understate the actual growth rate of the economy maybe because--

Russ Roberts: the price index--

Gabriel Zucman: of a problem with the price index, the price indices--yes--and they overstate inflation and they don't properly take into account new products. So, the price index that we use, and it is also a difference with some of the studies that you mentioned, is, I think, what's probably the best price index, the one that takes into account the substitution bias and other problems with the CPI [Consumer Price Index]. It's not the CPI. It's the National Income Price Deflator--it's the deflator that's used, the price index that's used to compute real macroeconomic growth. And it shows less inflation than the CPI. So, we already take into account one standard important criticism that's been addressed to this literature[?], which is, 'Oh, no; you understate real income growth because you have overstated inflation.' Now, maybe even the GDP Deflator or the National Income Deflator might overstate inflation. That's possible. What we do is that we take the National Accounts data as given; that's really one[?] limitation of what we do. We know that they have problems. But we think it's valuable to say: Let's introduce distributional measures in this macro data, and then if the macro data change then our results also will be changed.

Russ Roberts: Yeah, no, I think that's exactly where I do think you are using a better--it's such a complicated question, right? Because ideally what you want is a basket of goods that the bottom 50% buys. Which is, of course--the macro, the GDP Deflator has business purchases and there's a big interesting technical question about how computers have changed the price over time and how that's affected productivity; and whether we are measuring it correctly for individuals versus the economy as a whole, and not something to get into right now. But the--I mean, it's obviously a really hard problem; and you did the best you could. Obviously. I think you did. There's nothing particularly easy or definitive about that decision. You have to make a decision; and that's probably the best one, and it's consistent with the GDP accounts, so it's a good choice.

Gabriel Zucman: And, I didn't answer your question on consumption growth, which I think is very important. So, first of all, consumption--the data we have to study consumption are frankly of limited quality, unfortunately. They miss a lot of consumption. They [?] capture well the consumption of the wealthy and so on. But the second thing that's important is that consumption and income can evolve differently, if saving rates change.

Russ Roberts: True.

Gabriel Zucman: And certainly that's part of what has happened in the United States, which is that household debt has skyrocketed before the Financial Crisis; the saving rates of the middle class and the working class has collapsed. What we find is that in the 10 years before the Great Recession, the saving rate of the bottom 90% of the wealth distribution--when you rank people by wealth--was actually negative. Okay? So, they were consuming more than their income. And that's a big part of, you know, the macroeconomic story. And also can help reconcile the trends in consumption--maybe there's been some increase in area[?] of consumption with the trends in income.

Russ Roberts: Yeah, it's an interesting point. Obviously, in the run-up to 2007, 2008, a lot of people saw their home--the values of their homes or what they thought was the value of their home--rising. And many people borrowed from that future, what they thought was a future capital gain, in order to increase their consumption now. And then it turns out that capital gain never materialized. And, it's definitely the case that there was some consumption that was financed out of thin air that wasn't real. Financed out of creditors who never got their money back. For sure. Who consumed less, presumably, than they expected.

45:33

Russ Roberts: Let's turn to the causes. So, the first--you mention four, which are all interesting: the decline in unionization in the United States; the stagnation or actual fall in the real value of the minimum wage; the loss of bargaining power of labor; and access to education. So, I don't understand those arguments in general. I do understand the last one. Let me raise the issues I don't understand about the first three. So, let's start with unionization. Unionization in the United States in the private sector, pretty much fallen steadily since 1945. In the aftermath of WWII, manufacturing as a percentage of total employment fell steadily; unionization fell steadily both in percentage and absolute terms. And so, it's hard to understand why, when we look at--let me say it differently. When we look at all the data on these issues of stagnation of the middle class--again, I'm moving away from inequality right now; just this question of how the average person is doing and whether they benefit from growth--it's hard to understand why 1973, say, or in your case with your data, 1980, it looks so bleak. Because that unionization was falling all along. And those gains in the measured data are very different in the post-War, 1945-1973 or 1974 period than they are in the later period. Suggesting maybe it's not unionization. What are your thoughts on that?

Gabriel Zucman: I think it's possible that the decline in unionization affects income distribution. We saw some lag because it takes time to change, you know, wage contracts. There is some stickiness in labor agreements. What I find pretty striking is when I look at the cross-section of countries today, and also, you know, the panel[?] of countries, at the global level, there is a pretty strong correlation between unionization and income inequality. So, you look at the countries that, where the middle class is doing well these days. Germany, Scandinavian countries: These are economies where unions have power. You know, unions are in corporate[?]. A big function of the workforce is unionized, much more than in the United States. So, these are economies that, just like the United States, have been subject to the same trends of globalization, open international trade; they do import a lot of stuff[?] from China; they do export a lot; they are very integrated in global markets. They have faced the same trends in terms of technological trend, technological change. And yet, the income distribution, and the growth rate of income for the middle class and the working class, has been very different. And it's hard to say what fraction of this owes to unions and what fraction of this owes to minimum wages, education, and other factors. But all together, I think the reasons we have suggest that, broadly speaking, policies matter a lot. And policies affect the pre-tax and transfer distribution of income. And, they matter a lot. Because, if they didn't matter, we should see the same orders or same trends in all the world's developed countries as in the United States. And that's not at all what we see.

Russ Roberts: Well, I guess the question is: What other trends are going on beside policy changes? The demographic changes we talked about, to the extent that they are hard to control for, could be very different in the United States than elsewhere. I think worldwide, in general, there are similar trends. You are right--they could be different in some countries relative to others--the magnitudes may not be the same. But the growth of command of the top 1%, the income share as measured to going to the top 1%, has grown very dramatically in a lot of industrialized countries. And, I just think about--well, anyway--I'm not--I'm open to the possibility it's unionization. I don't think it's as you say. It could be just one factor. But there are other factors that are not the same across countries. Globalization is one that is similar across a lot of countries. But do you have any idea of what unionization is in Germany? In the United States, I think it's now under 10% in the private sector.

Gabriel Zucman: I don't want to say, you know, [?] know off the top of my head, but I do know that unions in Germany, they play a much bigger role in corporations than in the United States. So, typically, unions have several board members. They are in the corporate world. So, they are involved in decision-making at the--within corporations. And, yeah, that's a big difference with the United States. And it's likely to be part of the reason why the German working class is doing working than the United States. You know, just the buying power that it has is why it's stronger. In the United States, corporations increasingly since the 1980s have been viewed as having for sole purposes the sole purposes of maximizing shareholder value. So, that's something that's, that's [?] very strongly in the United States--what a CEO [Chief Executive Officer] should do is maximize shareholder value. Now, ask this question to people in Germany, to people in Scandinavia, 'Is the role of a CEO to maximize shareholder value?' And they have very different answers. You know, most of them would say, 'No. There are several stakeholders. There are shareholders. There are workers. Customers. Local governments. And we have a duty towards all of these stakeholders, not only shareholders.' And so, of course, if this, such a different state of mind, I think that explains, you know, part of the difference between the United States and other countries. And I think if you look carefully at the data, I'd like to push back a little bit on this idea that the top 1% has surged everywhere. I think the rise in the top 1% income share among rich countries is actually a uniquely American phenomenon. It is not something that you see in Continental Europe. It is not something that you see in Canada. It is something that you see a little bit in the United Kingdom, but the magnitude in the United Kingdom of the rise is much less than the United States. The United States is the main people[?] the outlier among rich countries. The top 1% used to have 10% of total pre-tax income in 1980. Now, around 20% of the total pre-tax income. Whereas, for the bottom 50%, it's exactly the opposite. The bottom 50% used to have 20% of total pre-tax income in 1980. Now, it's[?] around about 12% of total pre-tax income. There is no other developed country in the world where such a phenomenon has happened since 1980.

53:58

Russ Roberts: Well, you know, there's two possible--we were talking mainly about the bottom 50% before, but now we're on the top. The United States has--again, remembering that we're not following the same people. We're looking at a point in time. I always use the example of an athlete. In 1980, Larry Byrd and Magic Johnson were the best basketball players, and they made a lot more than the average person in the stands who was following them. In 2014, the best basketball players, I would say--you could argue who they are, but let's say--LeBron James and Stephen Curry. They make much more than--the ratio of their income to a fan in the stands is much higher. Because basketball is a lot more popular around the world; globalization has occurred; the gains to being the best have increased. And one could argue that, 'Yes, in the United States it's much easier to make a lot more money today than it was to make a lot more money in 1980.' And that's not a bad thing. There are examples of it that are bad things--people on Wall Street, I think, have benefited in a grotesque way from the willingness of the U.S. government to treat them with special favors; and I think that's a distortion that we should be upset about. Whether we should be upset about LeBron James--we might want to tax him more. You're right. We might agree that that's a good thing. We might not. But if we just looking at the underlying effectiveness of the economy and the role of market forces versus, say, government policy to set salaries, I don't find anything surprising or disturbing about the fact that the United States is in many ways a more entrepreneurial economy than outside the United States--the opportunity of access to venture capital is unparalleled. So, there are a lot of reasons why Sergey Brin and Larry Page and Mark Zuckerberg and LeBron James and all these folks--entertainers would also be included--do a lot better today than they did a long time ago. And I don't find that disturbing. I find parts of it disturbing. What are your thoughts?

Gabriel Zucman: Well, I think--and I know--basketball, particularly, is not a good example, because I'm sorry to say but people in Europe and outside of the United States, most of them don't really care about American basketball. And so it has always been and still is something that is of interest only to the United States.

Russ Roberts: I think they care in China, actually. Which is kind of a big country.

Gabriel Zucman: Maybe. But, to me, what drives, what has been driving top incomes and in particular for top corporate executives is there is much less globalization than the big changes that have happened in terms of tax policy in the United States. So, think about it. Globalization happens everywhere. But, it's only in the United States that you've seen CEO pay skyrocket. What has happened in the United States--the United States was the country in the 1960s with the highest marginal income tax rate in the world--90%. It's hard to have more than 90%.

Russ Roberts: You can have it.

Gabriel Zucman: You can.

Russ Roberts: There's not much room. It's not a good strategy.

Gabriel Zucman: You can have 100%. But it was 90%. It's moved from 90% to something in the mid-20% in 1986, just until the Tax Reform Act of 1986. It's a dramatic development. Where, recently[?] in the 1960s, you face a 90% of marginal income tax rate. There is absolutely no incentive to try to earn $50 million dollars in income, when out of any extra dollar that you earn, 90 cents are going to go to the IRS [Internal Revenue Service]. There's just no such incentive to do so. Of course, when you face a top marginal income tax rate of 20% or 30%, now it becomes valuable to try to earn very high incomes. And then the question becomes: 'Okay. Is it now, top earners have incentives to earn more? Is it good? Is it, you know, translating into a lot of growth for the United States as a whole? Or is it mostly at the expense of other stakeholders?' And here, there is no perfect evidence. But, at a high level what I find compelling is that you don't see that macroeconomic growth has been spectacularly high in the United States since the 1980s. Again, actually, it has been pretty low. You don't see that. But you see the income of top earners has boomed. So, one reading of this evidence is that, thanks to these lower tax rates, high earners have been earning more. But it's not because they have been producing so much more. It's because what they've earned is other crops[?] of the population which have not earned, actually, that income. So, it's at the expense of other stakeholders. And typically, corporate executives are better able now to extract very high salaries from corporate bonds in the United States. That's at the expense of shareholders. That's at the expense of, maybe, other workers in the firms. That, I think, explains not--certainly not everything--but part of the increase in the very highest incomes in the United States.

Russ Roberts: Well, it's interesting you mentioned that Europeans don't care much about basketball. I thought you were going to say that basketball players don't make a very large portion of the 1%. Even athletes don't, and even entertainers don't. And some might even say it's not so much Wall Street, even. There's a big debate, and you're going to help me understand it better because I think you know the data much better than I do as to what the real source of those income gains are. When you mention CEOs--a lot of people have argued--I don't know if it's true, but a lot of people have argued that American CEOs make more because they tend to have more responsibility. Their companies are dramatically larger than companies outside the United States. The part of this--so, I'm interested. So, CEOs are part of the 1%, for sure. So, I'm interested in what your thoughts are on sort of the decomposition of where that income comes from in the top 1%. Because I know you've looked at it.

Gabriel Zucman: In terms of who are the top earners, a lot of them are indeed corporate executives in various industries. So, finance is an important component; it is far from all of it. In lots of industries--in finance, in the health care industry, manufacturing. So, across the board--in the pharmaceutical industry--you've seen the pay of the top executives grow automatically faster than average worker pay. That's part of what's happening. But, the data we have now, getting back to our distributional national accounts, shows that most of the--now, the majority of the income of top 1% earners is not labor income. Is not wages and salaries and stock options and bond indices[?]. It's actually capital income. And that's a relatively new development. In the 1980s, 1990s, the rise of U.S. income inequality was essentially driven by an increase in labor income inequality--the upsurge of top corporate executive pay. Since 2000, it's been very different: labor income inequality actually has not increased, might even have declined internally[?]. All of the rise of the top 1% income share since 2000 owes to an increase in capital income, in the dividend income, corporate profits, interest that high-income earners get. And as important, because, of course, the forces that shape the distribution of labor income and the distribution of wealth and capital income are quite different. And so if you want to understand rising inequality in recent years in the United States, you need to ask yourself, 'Okay. Is coming from capital. So, what's the reason for that?' So, one potential explanation is that these high-labor incomes of the 1980s, 1990s, have been saved at a pretty high rate, and so these high earners have been accumulating quite a lot of wealth. That wealth itself, it generates some return; and so capital income, which in turn is flow of capital income, is being saved at high rates. So, wealth further accumulates and capital income concentrations further increases. And, I think that this is what is happening in the United States at the moment. Not everything corresponds to that. But that was not very important in the 1980s and 1990s. Now it's becoming very important. Capital income at the top is more important than labor income.

Russ Roberts: Yeah, no; that's very interesting.

1:04:07

Russ Roberts: The point I wanted to make--I lost my train of thought a minute ago, but the point I wanted to add is that: I just don't agree that saying that you want to maximize shareholder value means therefore that you don't care about stakeholders. Outside the profit and loss. Obviously, if you treat your workers badly, you are not going to have very good returns for your shareholders. I guess the question, though, is whether there is some room to, or cultural constraints, on either CEO pay or what you have to pay workers that would be more likely in those places you are talking about. I think that's the question.

Gabriel Zucman: Yes. And I think when you have worker preemptives[?] in corporate boards[?], that sets limits to CEO pay--and that--there's no research limits in the United States. In the United States it is possible to get salaries of dozens or hundreds of millions of dollars. In a way that's for--you know, that seems impossible in Spain[?] or in countries or in most German corporations. And there are cultural reasons. There are reasons that the Internet[?], the role of unions, incorporate both. And there are tax reasons as well. And in the United States, again, if you manage, let's say, to earn income that's taxable as capital gains, whereas the top marginal income tax rate on that at the Federal level, 23.8%, that's, that's, that's not a lot. And so, when it's 23.8--yes, it's really worth it to try to earn a hundred million. In most other countries it's significantly more than that.

1:05:57

Russ Roberts: You are presuming--I want to--we can end with is, because I want to come back to your point you made earlier--we won't quite end on it if you have another few minutes. But the point you made about bargaining power. Usually market forces tend to result in higher salaries when taxes go up, and lower salaries when taxes go down. So, you are talking the desire people have to make more money. What your desire is, is that a market doesn't matter: you are stuck with, usually the market rate. So, when your tax rate goes--say, your tax rate goes up. If you can still get the job, usually that's going to increase the market wage you are going to earn. But, if you don't believe wages are set by market forces--which maybe they aren't; but for CEOs, they might not be. There might be some ability of Boards to act capriciously if sufficiently large. But, going back to the average person: I've never understood this claim that bargaining power matters. There's--I'm not in a bazaar. I'm not in a street market or a farmer's market where I can haggle over prices. There's a going rate for, usually, a certain type of skill. So, my bargaining power--maybe it means something differently than what I hear when you use that phrase.

Gabriel Zucman: Well, I think it--this is a question that is connected to the growing evidence about the rise of market power in the United States, and the fact that it seems we are increasingly so, and not on a perfectly competitive market. And, neither on the labor market nor on the product market. There is growing evidence of rising market, of rising concentration, maybe of rising monopsony power in the labor markets. And as soon as you on[?] it in the Econ 101, perfectly competitive, perfect-information markets, you know, pay can be different than the Marginal Product of Labor. It can be higher; it can be lower--in ways that are determined a lot by intra-firm bargaining, and so by directive[?] power of unions. And by policy. And, that, I think is--you know, explains, again, part of the divergence between wage inequality in the United States and wage inequality in Europe--in countries where salaries tend to be fixed by rigid salary scales. And much less by pure market forces. Which don't necessarily give you a wage equal to a Marginal Product, depending on the type of competition that you have.

Russ Roberts: Yeah; well it's interesting, though, at the--you are in the Bay area in California, where I spend my summers. And I run into and chat with a lot of engineers at Google and Facebook. And, Google is not using their monopoly power to the extent they have it to pay low salaries and treat their workers badly. They are very pleasant places to work. Maybe be even more pleasant if they had less market power. I don't know. I think--I actually think they are making some monopoly power and they are using it--they have some and they are using it partly to reduce their turnover rate. And the, their workers, the ones I talk to, feel that they are relatively well-treated. And they do make a relatively large amount of money. I think get free lunch, too.

1:09:42

Russ Roberts: Let's close with something we can agree on, with a little more eagerness, perhaps, which is the education system as the last factor that you mention. I think we probably agree that the people at the bottom half, and certainly the bottom 20%, have bad access, inadequate access to skills, and certainly to even formal education. What do think we can do to do a better job there?

Gabriel Zucman: That's a complicated question. But it's one of things that I find most striking and shocking about the U.S. economy--is, how well your probability to attend college is predicted by the rank of your parents in the income distribution. That is, it's almost a perfect 1-to-1 correlation. If your parents are in the top 1%, you have 100% chance to attend college. If your parents are in the bottom 1%, it's not like you have zero probability you have to attend college, but it's close to zero. It's not 10%. So, think about it. This is incredibly unfair. And a huge problem for the United States. Now, what are the ways to address that issue? It's a complicated question. So, I personally think that tuition fees, you know, tend to prevent access to 4-year colleges for young Americans from a working class background. And so that having more free public higher education could help having more equal access to higher education. Now, if that's one thing that might help, it's far from the only thing that's important--

Russ Roberts: The important thing is to graduate. And graduation rates are even--

Gabriel Zucman: [?] Absolutely. [?] I also think that lots of problems of, at the high school level, the elementary school level. And so, these are [?] very important questions. Maybe we can talk about these in another show.

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This is a Job for Super Regulator!tag:www.econtalk.org,2017://2.153042017-09-13T19:38:59Z2017-09-13T20:07:45Z What if librarians were charged with coming up with the next search engine? Would the legal infrastructure in place today support, complicate, or even hinder their efforts? Would the American Library Association be of help? Would they be able...Amy Willishttp://www.econlib.org What if librarians were charged with coming up with the next search engine? Would the legal infrastructure in place today support, complicate, or even hinder their efforts? Would the American Library Association be of help? Would they be able to do it fairly, allowing open access to others?

This compelling thought experiment closed this week's EconTalk episode with University of Southern California professor of law and economics Gillian Hadfield. Hadfield argues that the US legal structure, while well-suited to the 2oth century, is in need of an update. She has suggestions for this process, which host Russ Roberts says suffer a marketing problem. Can you help?

1. Why do we need to "reinvent the law," according to Hadfield, and what does she suggest such a reinvention might entail?

2. What is "super-regulation" and how might this allow regulatory regimes to be more innovative? Why does Roberts suggest that this idea has a marketing problem? Do you think this problem is surmountable? Why or why not?

3. How do "certification regimes" (such as for Kosher food and organic products) differ from Hadfield's "super-regulatory" structure? Which would be better equipped to manage the future of autonomous vehicles, and why? (You may wish to revisit the recent episode with Benedict Evans for inspiration.)

4. Why does Hadfield assert that the US legal infrastructure would be better served if the legal profession were structured more like the medical profession? To what extent do you agree, and why? (Another hint: You may wish to revisit Roberts's conversation with Christy Ford Chapin on the role of the American Medical Association in the evolution of the American health care system...)

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Gillian Hadfield on Law and Rules For a Flat Worldtag:www.econtalk.org,2017://2.152922017-09-11T10:30:00Z2017-09-15T12:49:43Z Law professor Gillian Hadfield of the University of Southern California and author of Rules for a Flat World talks with EconTalk host Russ Roberts about the ideas in her book for regulating the digital future. Hadfield suggests the competitive...Russell Robertshttp://www.econtalk.org
Law professor Gillian Hadfield of the University of Southern California and author of Rules for a Flat World talks with EconTalk host Russ Roberts about the ideas in her book for regulating the digital future. Hadfield suggests the competitive provision of regulation with government oversight as a way to improve the flexibility and effectiveness of regulation in the dynamic digital world we are living in.

Highlights

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0:33

Intro. [Recording date: August 28, 2017.]

Russ Roberts: Gillian Hadfield is the author of Rules for a Flat World: Why Humans Invented Law and How to Reinvent It for a Complex Global Economy, and that book is the subject of today's conversation.... So, let's start with the central idea of the book. Why do we need to reinvent law for our complex global economy? What's missing with what we have now?

Gillian Hadfield: Well, the reason we need to reinvent is first that it's critical infrastructure. So, it's not just something we layer on top of our market economy to maybe respond to market failures; but it's the basic platform on which humans have always built sets of rules; they've also built whatever relationships are creating value in that society. And the legal infrastructure we have today, which is what everybody thinks of when we say "law,"--law made by governments, nation states, changes when you cross boundaries, jurisdictional boundaries--mostly done through closed professions and public production. That's not working very well. It's too expensive; it's too complex. And, surprisingly, it's just not solving the kinds of problems that we face in light of globalization and technology and our increasingly diverse global environment. So, the reason we need to fix that is it's not doing what it's supposed to be doing. Most ordinarily people can't access it all. And even for large global corporations who can afford the best of the best, what they will tell you is it's not really doing what they need to do to operate in a global, complex environment. And it's certainly not well-adapted to managing changes that are coming down the pike, in terms of artificial intelligence, new technologies, and so on.

Russ Roberts: Explain a little bit by what you mean by 'legal infrastructure,' which is really the center of the book. I think most people probably misunderstand to mean simply things like how the courts work. But you mean something much broader. Talk about that.

Gillian Hadfield: Yeah. So, I use the term 'legal infrastructure' because I really do want people thinking in terms of infrastructure--the thing that you're building on and the thing that you are taking for granted. It's shared capital. And I mean something more than the legal system, as you say. So, most people, if you say, 'law,' to them, they will think, as you say, 'Laws--rules--are made by legislatures and regulatory agencies. They are adjudicated in public courts, state courts; enforced by the state.' And we talk about different legal systems like common law systems and civil code systems, Continental, Anglo-American. And what I mean by legal infrastructure is that stuff--that stuff we're currently using the make and enforce our rules. But I also mean the practices, the norms, the beliefs that structure it, the cost of accessing it; the ways in which our markets for legal services and legal rules are organized and how well they work. So, you know, not just, you know, the fact that you would get legal advice, you can only get legal advice in America from a licensed attorney in the state, but I'm also interested in: What's that lawyer going to tell you? How are they educated? What will they bring, what human capital will they bring to resolving the problem you want to address with them? How much will it cost? And so on. So, I'm trying to think of the entire mix of both the design stuff, and the emergent stuff, in the same way that our traffic infrastructure is defined, both by the roads we've built and how the traffic develops over time and how people use it and what people do with it.

5:05

Russ Roberts: Long-time listeners here will recognize the distinction that Hayek made between law and legislation. For Hayek, legislation was what governments and legislative bodies did. Law, he reserved that term for the expectations people had about the rules of the game. And you are making a slightly different set of distinctions. And I actually--I want to try to get to one in a little bit that I found extremely useful and thought-provoking. But the other point I want to get to that you make is that we should be thinking about the rules by which we make the rules. Or the laws by which we make the laws. And how we're so used to the current system--which is centuries old here in America--that we can't even imagine really breaking out of that box. And, talk about why that's important and why that should be a focus.

Gillian Hadfield: Yes. And I find this especially true with economists and political scientists--we define 'law' as the stuff we know now, the system we know now. Like you say: governments producing it and states enforcing it. That's not even actually a very good description of what, how a lot of our rules are created and enforced today. But it's what dominates people's thinking, so we talk about changing the law; we talk about what will we lobby Congress to do, or what regulations will we propose or oppose. And the reason it's so critical to think about, to recognize that's not the only way to make law--law is the way that, actually my colleague, Barry Weingast, at Stanford and I have been thinking about this for quite some time: We really define law as, you know, a set of classifications that a community has landed on. So, everybody knows that everybody knows that it's okay to not do what you said you were going to do if you didn't shake hands on the deal. Everybody knows that everybody knows that shaking hands on the deal is what's required to make it enforceable. And, there's lots of ways you can do that, for the community to do that. Law is this set of rules that we have about how we do that. And, the reason we need to think about what the rules are for making the rules--who can make them, how can they make them, what can they look like, how are they enforced--is that that's the production system for our legal infrastructure, and we spend a lot of time talking about what rules we think we should have, and almost none talking about, 'How well is the production system working?' So, I want to get people thinking about: What's the process by which all that legal infrastructure is being produced? That's what's affecting behavior on the ground. And we need to think about that production system, just like economists would think about production in other settings.

Russ Roberts: It's a great point. And I think the way most economists think about is: The regulatory structure that we have is whatever the legislature produces. And then, whatever the administrative state then implements. And maybe it's not always enforced--that's, I think, the economists' contribution is to remind people that not all laws are enforced. Which is a very important point, because I think it's often assumed that, 'Well, it's against the law, so it doesn't happen.' But, of course, it does happen often, especially in other countries but even in the United States. Legal--enforcing laws is expensive, and a lot of times there's no stomach for enforcing certain laws. And so, we end up with a very complex set of rules, some of which are on the books--say, the one that Don Boudreaux likes to talk about when he's been on here is, the speed limit is not 55 [miles per hour]. You can go 57, for sure. In some places you can go 61. 62, you start to get into some risk of being in trouble for speeding. But, there is this complex interaction between what's legislated and then the social norms that develop around it.

Gillian Hadfield: Right. No, and so this phrase that a lot of people use--Roscoe Pound introduced the idea of this difference between law in the books and law on the ground. And, part of talking about legal infrastructure rather than legal systems is to emphasize that what we're really interested in is what's happening on the ground. As you say: What are people enforcing? What does your lawyer tell you is the actual rule? Like, you just said with speed limits, right? Well, the actual rule is not 55. Although they are allowed to ticket you for going 56. But, everybody knows that everybody knows that that's not really not what's likely to happen; and therefore you can evaluate your risks of, you know, heading down the highway at 62. Our legal production system is a very, very closed system that lawyers are particularly prone, I think, to the view--even though they are well aware that things are different on the ground--we have this strong view that, you know, you have made law when you put it down on a piece of paper. And, as you point out, that's not true even in advanced settings like the United States. And it's really not true in countries where we recognize that they need more rule of law, to support better economic growth and other goals. So, yeah: absolutely. We need to be really thinking about what's happening on the ground

11:00

Russ Roberts: And I want to come back to this closed aspect of the system, because that's really interesting. But I first want to read a quote about this norms, rules, interaction that I think you make extremely well and I hadn't thought about before. It goes like this--it's a quote from the book:

Social norms are not the product of an enterprise. They are organic. They emerge and adapt to processes that may be hidden and hard to control. There may be social entrepreneurs who try to establish a social norm by preaching from pulpits or billboard or blog, for example. But there is no single recognized process that everyone understands is the way that a norm becomes the norm. It is when norms become the subject of a deliberate project intended definitively to designate a particular set of rules, including the rules for making the rules, as law, that social norms can become law.

There's a lot there. It's a very rich quote. But, the idea--you know, I talk a lot on this program about emergent order and about how norms emerge and how they are hard to control. And you can urge people to do something and it may make no impact whatsoever. Or, there can be a social movement that changes the way people look at something like smoking. Or attitudes of various kinds. But your point that, until it is when norms become the subject of a deliberate project--meaning, they are not emergent in the same way: there is some explicit process that people recognize as the rules for making the rules. Which is not true of social norms. Social norms--the idea of wearing a hat; the idea of greeting someone you don't know well by their first name--all these changes that have taken place in our culture that are constantly changing--the way language and social interaction evolves--those are under no one's control. And everyone understands they are under no one's control. And yet, they also understand that they change, and that you have to pay attention. But, law, the point you are trying to make here, which I think is an interesting--it's a different distinction than the Hayekian one--you are arguing that law is when a social norm has an established, public, objective process, transparent process, for how the rules get made. Legislation being one of those, but maybe not the only one.

Gillian Hadfield: Right. Right. And it may be transparent, but not necessarily so. I think what's really critical--

Russ Roberts: Not so transparent--

Gillian Hadfield: Right. So, I like to say, 'Look, it's when'--and, the concept that really matters here is that of common knowledge. And that is: So, in the emergent setting, in the social norms setting, we have common knowledge that everybody knows--that everybody knows that men don't wear dresses to work. And, when we are talking about law, we are saying: The source of the rule is an identifiable institution or person, and everybody knows that everybody knows that that is the institution or person. It's the king. It's the counsel of elders. It's the legislature. It's the community council. It's what we voted on at the camp the night before. And what's critical, if it really is law in the sense that I'm using it, everybody knows everybody knows that that's now the rule. And the capacity for deliberate content, which is I really think the important thing to emphasize about law--not the enforcement mechanism. Let's assume the enforcement mechanism is exactly the same as in the social norms. Which is to say, ordinary people deciding, 'Hey, I'm not playing with you because you don't follow the rules.' What's really critical about law and the reason it's such a critical human invention is that when you have transferred from the world of 'all your norms are just emergent' to the capacity to now say, 'Hey, everybody, we're going to have a meeting. We're going to choose the rule. It's now okay for men to wear dresses to work.' Or, for people to get out of contracts when there's been a significant change in circumstances. Whatever it is. We can go to sleep one night with the old rule. We can wake up in the morning and have confidence that everybody in the community knows that that's the new rule and that that's the basis on which we'll be moving forward. And that's really critical in terms of the capacity to adapt to changing circumstances, changing knowledge, complexity.

15:47

Russ Roberts: Just as an aside, and I don't think you talk about this in the book: Even when you, even when everyone wakes up the next day and knows there's a new rule that says, 'Contracts are not 100% enforceable, because there may be,' let's say, acts of nature that everybody agrees on. That, that's now known to be a reason that you don't have to uphold your end of the contract. It's still going to be a question of what an act of nature is. And I just want to mention that in Law, Legislation, and Liberty, Hayek argues that what judges should do when they interpret a dispute over acts of nature, is try to figure out what people had in mind; and what their social norms were underlying that legislated contractual requirement. Because, inevitably there is still uncertainty. There is no way, and there can never be a way, that any law, rule, legislation can cover every case. And so, almost by definition--not 'almost.' By definition there has to be interpretation at some point along the way. And, a mechanism for who does the interpreting.

Gillian Hadfield: Absolutely. In fact, I think Weingast and I have been really been emphasizing that we think you start to see the emergence of formal institution that has that capacity. As if to say, when I say, 'Announced of rule,' it's forward looking, as you said. Acts of nature are a valid excuse for not performing your contract. That, that, you know, we can announce that. As you point out, that's going to require interpretation in various settings. There's going to be ambiguity in what's an act of nature. And, it's precisely the pressure and the creation of ambiguity in what the rules are, that we think generates the demand for, and then the production of, institutions that perform that role, where everybody knows, everybody knows, 'That the institution.' We can argue about it, but we've now we've now set up a country system. Or, we've designated a smart member of the community, whoever--an arbitrator--

Russ Roberts: It you could agree on it,

Gillian Hadfield: However: an arbitrator--

Russ Roberts: Yup, if you'd agree on it, an arbitrator.--

Gillian Hadfield: That's right. We can set up whatever the institution is, we know that, when we go to that ambiguity resolution institution, what that institution or person says, that's it. We stop arguing. I may still think it's the wrong answer, right? I hate the fact that I lost the argument. But, I do know that everybody knows that everybody knows that that was the answer, and therefore I can predict that that's how people will go forward. If I don't pay up on my contract after the court had said, 'Sorry: that's not a valid, that's not an act of nature, that's not an excuse of performance,' then I know that the community will say, 'Ah, she breached her contract. She's less reliable as a business partner,' or somebody we're not going to do a deal with. And that ambiguity reduction is absolutely central to the reason for the emergence of law and the function it should be performing.

19:03

Russ Roberts: So, I want to probe into that a little bit, because in the middle of the book you spend a lot of time arguing that our current innovations and technology aren't served well by the current set of rules. And it's not enough to just change the rules. We need a better way for how the rules get set and allow more innovation in that process. We'll get to the details of what you propose in the last third of our conversation. But I want to try to set the stage for that and challenge your view a little bit, and try to get you to clarify it a little bit. So, we recently had Benedict Evans on EconTalk talking about autonomous vehicles. You mention them in a number of places in the book. It's pretty clear that the regulatory legal landscape for an autonomous vehicle is uncertain right now. You have people pouring literally billions of dollars into these innovations because they assume that will get "fixed." They assume that we'll "figure out" how to get there from here. And one of your arguments is that the current system doesn't handle these kinds of innovations very well. And what I want to ask you is: Why? I want to push you on why. Because, it dawns on me that part of the reason that it doesn't solve these systems, these problems so well isn't just because our legal system was set up in 1750 or 1850 and comes from England or whatever. It's that these are really complex, unusual, and not easily-defined situations. One example obviously being liability. You talk about this: when the autonomous vehicle hits a pedestrian, whose fault is it? Is it the program or is it the corporation that made it? Etc. So, talk about why those kind of problems aren't served well by our system and why we need a different way to set the rules.

Gillian Hadfield: Well, I think the important thing about--the autonomous vehicle is a great example, because what we're looking at the development of there is, it's not just that it's an autonomous car that used to have a human in the driver's seat and now it's got a computer. What will be [?] development of, of course, is an entire connected system. Those cars are going to have sensors in them; you're going to be talking to your cars; they're going to be talking to weather, they're going to be talking to traffic; they're going to be reading the environment. There's going to be a changing number of autonomous and human-driven cars on cities and streets; it'll go place to place to place with different sets of rules. So, we want to think about that as a complex, adaptive system in that formal sense of complex, adaptive system--meaning, there's lots of interacting agents making lots of decisions, and it's very difficult to know where it will go next. That's a really new type of problem for us to be figuring out how to regulate. So, the critique I'm making about our existing systems we're solving that, is that they are currently dominated by--we have technical experts, of course, who are playing a role. But dominated by the legal infrastructure we have available, which is: Lots and lots of lawyers involved in the development of policy, the drafting of policy, the implementation of policy, advice about legal rules. And we have a particular kind of technology of regulation. Our technology is: smart people will sit down, figure out what the rules should be, write them down somewhere; lawyers will advise about them, people will make decisions. There will be potential enforcement actions, public and private. And penalties imposed for failing to follow the rules. Well, you know, to regulate complex traffic systems with lots of machines in them--maybe we need technology to do that. Maybe we need AI (artificial intelligence) that is actually performing the function of regulation in constant data exchange with what's happening on the roads and maybe the capacity to directly intervene in the way a machine learning algorithm is developing or the way a particular vehicle is performing or sensors are performing at any point in time. And that's the kind of thing that our existing approach to building a regulatory structure just really can't do. So, the reason I'm emphasizing we need to be thinking about our production process for rules and regulation is: Where are we going to get the new ideas for how to regulate? Where are we going to get the new approaches to regulation?--that I think we'll need for a much more complex environment.

24:17

Russ Roberts: So, I want to take you down a little thought experiment, then. One of the challenges of the autonomous vehicle is it's really expensive to develop 5 or 6 different sets of roads. So, we start off, perhaps incorrectly, but we generally start with the assumption that autonomous vehicles are going to use the public roads, not private sets of roads developed by Tesla, Uber, Apple, Google, etc. And one way we could regulate this market is to give all those different providers, say, of autonomous transport the authority to set their own rules--knowing that they're in competition with each other: so they are not going to just set rules that make them rich, because if they do that, they are not going to have too many customers because they have competitors. And then, you would argue, if I understand your book correctly, is that the government could impose some meta-rules on those regulations. Or, they could even--which is the main thrust of the last part of your book--we could imagine private rule-makers there weren't Google, Tesla, Apple, etc., that were regulated by government. So, using that setting, perhaps, try to tell us how a different model would work for the production of rules.

Gillian Hadfield: Yeah. So, I want to really distinguish the proposal I'm making, which I refer to as super-regulation or competitive-approved private regulators, as a regulatory option. Not all regulation can work[?] this way; and one of the things I'd like to see economists and regulators working on more is, where could this work? But it's different from self-regulation in the sense of Tesla, Google, Apple coming up with their own rules maybe subject to some government oversight. I really think we need to be looking at the development of basically an industry that's attracting investment and attracting good engineers and more that's dedicated at the problem of figuring out how do you regulate in a complex environment, and being able to solve those services. Now, the fact of the matter is that the Googles and the Teslas and the Apples thinking about this autonomous vehicle world are already in the business. They know they need a regulatory environment. They are already in the business of participating in the building of that regulatory system, partly through lobbying Congress and legislatures and governments around the world. But also through participating in private efforts of standard setting[?]. And, what I'm saying is, we already know we need the private sector much more heavily engaged in the problem-solving of figuring out better regulatory regimes. How can we bring that within a public-law framework that says: Okay, you can figure out how to regulate; but here are the publicly determined, accountable criteria that that regulation has to achieve. So, very simplistically, in the case of the self-driving car, there's a tolerable level of accidents on the road, and congestion levels; and you've got to hit those publicly-determined outcome criteria; but we're not going to tell anybody how they achieve those outcomes. We're going to let private regulators who develop systems that then private companies have to purchase into--we're going to let those private regulators figure out better ways to achieve those, those objectives.

Russ Roberts: Expand on what you mean by a private regulator, because for people who haven't read the book, that might sound like a weird concept. And, you can move away from autonomous vehicles if you want to talk about a different setting to make it clear. But, what you have in mind is sort of a middleman of regulation, that would, as you say, attract investment, charge for its services, and be competitive. It's not like a private version of the EPA [Environmental Protection Agency]. It's one of many monitoring or regulating bodies that would be distinct from the corporate world but also not governmental, that the governmental process would oversee. So, try to explain that a little more clearly.

Gillian Hadfield: Yeah. Sure. So, we're thinking here--it could be a nonprofit entity; it doesn't have to be a for-profit entity. We already have lots of nonprofit entities that produce regulation right now. So, FINRA [Financial Industry Regulatory Authority] regulates broker-dealers. That's a private nonprofit entity operating under the supervision of the SEC [Securities and Exchange Commission]. And the difference between the model I'm talking about and the FINRA model is I'm talking about: Okay, we've got FINRA, but it has a monopoly. So, it's really operating as if it was a government. And what we see is it behaves like it's a government.

Russ Roberts: Yeah.

Gillian Hadfield: It's like it's a government agency. So, what I'm trying to suggest we want to do is we want to say, 'Okay, it's okay, it's appropriate for the political realm to say: here are the criteria for regulating--here are outcome criteria; here are things we want from regulation,' say, in the financial sector. And, you know, there's various ways in which we are going to, as a government now going to verify that our private regulators are achieving those outcomes. We can audit them; we can sample particular cases; we can talk to the regulated entities; we can talk to the consumers or customers, businesses that are dealing with the regulated entity. But the ways in which that's achieved, whether it's achieved through written-down rules or adjudicated ex post, or it's achieved through auditing, or it's achieved through constant data-monitoring--whichever way it's achieved, individual providers of that service can compete for the most effective ways to achieve those objectives. So, the difference here is--so, it's important to recognize, we already have lots of private regulators in the business. They tend to be monopolies. Or they are voluntary, so that companies can choose or choose to or choose not to comply with their standards. But, the--I'm really emphasizing all three pieces of that. So, it's a private regulator. So, that's a profit or nonprofit that's in the business of developing regulatory schemes, regulatory services. It's approved, in the sense that it's licensed by the state--that it's achieving the objectives that are politically set. And, it's competitive. There are multiple, um, private regulators that are competing for the business of providing regulatory services. You have to be licensed to participate in that market. But, once you are achieving those objectives, you can explore, experiment, invent better ways of doing it.

32:15

Russ Roberts: So, the analogy that comes to my mind--and you can tell me if this is a good analogy or not--is, kosher food. There are a lot of different agencies that will certify that food is kosher. They have slightly different standards, but on the big things, they don't disagree. No pork, just to take one example; pork's out. So, if a kosher certifying agency says that this product is kosher, barring fraud or an accident, you can be pretty confident as a consumer it doesn't have pork in it. There might be other differences in the level of kosher that is kept by particular agencies. And, consumers learn about what those differences are and choose products accordingly. Those agencies charge the firms for their certification. It's very competitive. It's overseen by the government in some dimension in that if you are caught, if fraud, if you are defrauding your, if you are defrauding kosher consumers, I think kosher consumers can take you to court. Not quite what you have in mind. But it's something like that, I suspect. Is that a fair example?

Gillian Hadfield: Yeah. Yep. That's an example. So, that's a certification regime. We have lots of examples of certification regimes: organic certification. And they are under different levels of government oversight. I don't know enough about the way about the kosher certification system works. Sometimes what happens with the government oversight is the government is still in business saying, 'You have to have the following rules,' or 'You have to--your rules have to be approved by our agency.' So that's how FINRA operates, for example, with the SEC [Securities and Exchange Commission]. And I'd like to see more of the regulation of the regulator focused on the outcomes: Are you achieving the objectives that have been set for this type of regulation and the reason that we're regulating. So the only difference between, but really other than that, the only difference between what you are describing there and what I'm thinking of here is, that's a voluntary regime.

Russ Roberts: Correct.

Gillian Hadfield: Somebody can decide: I'd like to be certified kosher. I'd like to be certified organic, or not. And then there's a way of doing that. So that's solving an information problem in the market. And the difference here is I'm saying, 'Okay, let's take some of the features of that system, and now: Can we use that to think about how we regulate workplace safety? Can we use that to think about how we would regulate the use of machine learning in loan agreements, in loan decisions?' Or autonomous vehicles, as you said. So, it's really taking--there's features of this system in place all over. There's much greater role than I think people appreciate already for private providers of regulatory regimes. In a lot of cases we leave that to the actual regulating entity itself. Which I think is problematic--

Russ Roberts: It's nuts--

Gillian Hadfield: Or, it's voluntary. Or, it's not really supervised. Or, we're not really holding it accountable to publicly-set criteria. And I think this is a critical point. So, I use the example of the right to be forgotten. You know, Europe has introduced a directive or decision out of the European Court of Justice in litigation with Google saying that search--that people have the right to be forgotten by search engines. So, you have to be able to petition the search engine to stop producing old or invalid or false information about you in searches. So, that's a very elaborate right to have created. But governments are not capable of actually implementing that regulation. And so, it's been handed to search engines like Google to do the actually adjudication of that. And I think at some point last year, Google was reporting that they were adjudicating about 500 of these a day. Okay. So, the reason it's being handed to Google is the government can't afford it, doesn't have the technology. I'm quite sure Google is not stepping up to hand them all their access to all their servers--if they can find the stuff that [?] supposed to be in there.

Russ Roberts: It's problematic for a different reason.

Gillian Hadfield: So, it's handed to a private regulator. Now, it's handed to Google to regulate itself. I'd like, you know, for there to be an alternative, where it's, you know, Hadfield, Inc. or Roberts, Inc. or whatever; and that's, 'Hey, I've got a lean, effective way of implementing the objectives of that regulation--people being forgotten on the Internet. And I'm now selling that service; I'm demonstrating to governments around the world that I achieve their objective. And now I'm competing to sell that service to Google.' Google's being told you have to purchase a service like that. And you have to purchase one that political bodies have certified, licensed, achieves the objectives that we're looking for.

37:44

Russ Roberts: So, let's talk about a marketing challenge that you have with this idea. Which is that, when I was reading your book, I thought, 'Well is kind of interesting,' and I really liked the idea that if there was this intermediate layer of private regulation, there would be more innovation. Like we were just talking about with the Google example. But my general thought would be--and you can tell me if I'm wrong--that, this is not appealing to, really anybody. For hardcore libertarians--of which I am one, but I am sympathetic to some of what you are pushing for; but most hardcore libertarians are going to say: Oh, well, all you are adding is another layer of regulation; and that just pushes it farther from accountability. And the regulated company will get cozy with the private regulator. It's going to hard for there to be competition. There's going to be economies of scale. And then, that's on the free market side. On the regulatory, pro-whatever you want to call it, pro-government or interventionist side, they are going to say, 'Oh. Well, this is just a mistake. We just need to make government better at regulating. We don't need this.' So, does anybody like this idea? I mean, it's interesting and creative and clever, but does anybody like it?

Gillian Hadfield: It is a challenge. Yeah, yeah. Well, I'm working on it. Yeah. So, the point is that both positions that you described I would say are fantasies, in a complex environment. So, Fantasy Number 1 is that we can have this thing called free markets without rules. Well, there's no such thing as a free market in that sense. All markets are constituted by rules. And nobody would play in a market that had--well, you couldn't even define a market, right?--you can't define a market if you can't define who owns what, what are the criteria under which x is transferred from A to B for a price. Everything we talk about as economists is built on a pretty thick environment of what are taken-for-granted rules about the way the game works. Why don't we see--I think everybody agrees that one of the most important reasons we don't see growth in poor and developing countries at the rates we think there should be, why there were challenges, [?] challenges still for transition countries, is a lack of what now people call 'governance,' or the rule of law. You can't have markets without basic legal infrastructure. So, that's Point Number 1. This is not just about interfering in markets and developing rules to interfere. It's about building the basis of that market. So that's fantasy.

Russ Roberts: So, let me concede that. And I take the point. I think some people use it as a trump card to say, 'Therefore all regulation is required.' And that's obviously not your point. So, what your point is, which I really like, is: There's going to be some regulation. But then you have to make the case that your private regulator is better than the government.

Gillian Hadfield: Right.

Russ Roberts: So, you are adding this other layer. There's going to be uncertainty about how the government enforces--I don't know. It's--I think it's still a tough sell to a free marketer. Or just some of us like it. I kind of like it.

Gillian Hadfield: Okay. Well, I'm getting there.

Russ Roberts: Yeah.

Gillian Hadfield: So, let me just go to Fantasy Number 2, the idea of 'Just government can do it,' and say: Look, government can't. I like government. I think government should be doing lots of stuff. But they are not the type of entity that we think of as well-adapted to innovate. They don't produce technology. They are not going to be in that business. So, I'm partly saying: Look, we need innovative approaches to how to regulate complex things. We need jurisdiction jumping solutions for regulating complex technologies, because it's a global market, it's a global system, it's a global internet, and our existing governments are all territorially based. We need something that's going to jump those boundaries well. And so, the fact that we can--the idea that, 'Oh--well, the private sector can produce a government,' can produce it--I think that was the mistake of the reinventing-government effort that said, 'Well, let's just get government to behave more like the private sector '--I'm[?] saying, 'Well, no. It operates under a totally different set of rules and incentives. For good reason, to achieve different objectives. So, is this layering on? Is this more regulation? Oh, my God, is this, you know, we are going to double, triple, quadruple the amount of regulation that we have? The point here is that I'm aiming at a real shift in what we think of as government regulation. Right now, we have, almost all our regulation through government is command-and-control style: You know, this is the technology you have to use; this is the behavior you have to engage in; this is how often you have to, you know, review your transactions; this is what you have to be able to prove to us. As opposed to outcomes. Right? You can't have more accidents than this in the workplace. You can't have more suspicious transactions than such-and-such in your banking system. So, it's shifting that to the idea that government is getting into the role of establishing the outcome criteria. Those are the politically-determined outcomes that we require. And, getting out of the business of how are we going to produce that. So, that's actually a very different and potentially smaller role for government. It's not a less important role for government. I'm not in the business of trying to kill off governments. This is a different role for government. And I analogize it to the shift from central planning to a regulated market-based economy. You know, we used to have, 40% of the world or more, under a regime where governments decided which apartments to build and what dresses to make for this season and what foods to have on the shelf and how much steel to manufacture. And, you know, that's a system, for, you know, lots of reasons; but I think an important one is economies became so complex, that's very difficult to continue to operate. And, what we have as an alternative is: Okay, government gets out of the business of deciding how much steel to produce; but it does get into the business of making sure that the private providers who are deciding how much steel to produce are doing so through a competitive system. So, we have antitrust law. We have fraud law. We have--we might have rules in different environments that say, 'You have to make it available to poor people at this price,' with a subsidy, or whatever. So, we've changed the role of government. And I don't think that's necessarily more regulation at all. The fantasy on that side is the idea that somehow we can just have less regulation. I think that's just a very unhelpful conversation to be having. We can have differences, political differences, about how much we should try and change the outcome of whatever markets we construct. But the real argument should be about how we are going to produce the basic rules of how those markets operate.

45:35

Russ Roberts: So, one of the things I don't think you talk about in the book is Public Choice--in that, the incentives facing the people who currently making the rules are, I assume, somewhat in their favor. Meaning, the reason we don't have your world isn't just because they haven't read their book. They may not like that world for themselves so much, the people who right now are the gatekeepers to the rules. So, for a politician to give up control over the current structure, the way the current structure is set up, may not be in their self-interest. What are your thoughts on that?

Gillian Hadfield: I think that's exactly right. And I do think that's another reason to be thinking about this. One of the reasons I think it could be helpful to focus much more on outcomes rather than on the detailed form of regulation is that it's potentially a much more transparent approach to regulation, in the sense that we're having political debates--politicians are taking political stands--on what should the outcome variables be, what should the metrics be, for deciding what's effective and what's not effective in regulation. Rather than having 2000-page statutes produced, or bills, produced through a very non-transparent process of lobbyists and civil servants and, you know, politicians and other kinds of money and their, the role for corporations that are lobbying about their own regulation and be affecting them. I think that's a very non-transparent process; and I don't think our systems work very well at all in that context. So I spend a fair bit of time in the book talking about, you know, the way in which our regulatory instruments, our legal instruments, become so complex. Who really knows--does anybody know what's in most of these statutes or bills that are being voted on? So, I think it can be more transparent. But I completely agree with you that public choice is a big obstacle here; and that's also why I talk about the market for lawyers. Because, you know, one of the groups that I'm saying needs to not be so fully in charge of how our legal infrastructure is designed and developed are lawyers--who, kind of have too much sway over how we think about these things. And, yeah--that's usually--this could never happen, because lawyers wouldn't let it happen--a response that I get.

48:28

Russ Roberts: But, we can hold their feet to the fire a little better. And we can put political pressure on them to give up some of their power. I want to turn to that, because I have a--there's a very interesting part of the book, and particularly since we recently had an episode with Christy Chapin on the American Medical Association and how it shaped the evolution of medical care in the United States and our health care system. Talk about how the American Bar Association constrains our current legal infrastructure. Because, even someone like myself who is somewhat cynical about the American Bar Association, learned some unfortunate things about what they are able to do. So, talk about what they do and have done, historically.

Gillian Hadfield: Yeah. So, let's go back--if we go back to, say, the 19th century, in the United States. Nineteenth century is wide open. Anybody can practice law. In fact, a lot of states deliberately put in place legislation that said anybody who wanted to practice law could do so. There were no--very few law schools; there were no requirements of the Bar. If there were any Bar exams it was a couple of questions with the judge to be admitted to the Bar. So, it's a very open system. Now, the American Bar Association forms at the end of the 19th century, would be--the important goal is saying, 'Look, we need, we're facing the transformations of that economy, the industrial economy. We need more uniformity. We need better law. We need smarter law. It's important.' So, they began a 20-, 30-, 40-year process of what I argue is sort of creating a platform that really worked very well for the 20th century, much more uniform, high-quality legal infrastructure that allowed national businesses to emerge because they had some confidence about what was happening place to place: you didn't have conflicting jurisdictions and so on. But that process of--and the American Bar Association, it's important to remember, is just a trade association of lawyers. It actually doesn't have--well, it has only one formally recognized role, and that's it is the entity that is recognized for accrediting law schools in the country. And you have to be accredited if you want Federal funds and most states, Bar associations, have required accreditation to become a member of the Bar. But, what you end up with is, the American Bar Association coordinating Bar Associations in each of the 50 states. And it's the Bar Associations in each of 50 states that create a bunch of rules that say, 'Hey, there's really only one way to be--you have to have a law degree and be licensed as a lawyer to provide any kind of legal goods or services in the market.' Which is a very expansive definition. You have to follow what we'll call our ethics rules in providing those legal services. But the ethics rules--some of which are truly ethics rules and really very important and long-standing about, you know, fidelity to courts and--

Russ Roberts: confidentiality--

Gillian Hadfield: confidentiality. Conflicts of interest, and so on. But the really important regulations in there, and they are regulations--they are economic regulations. And they are economic regulations that say, you know, 'A lawyer can't be in a partnership or a business entity with someone who is not licensed as a lawyer.' They can't be--any kind of equity funding from someone who is not licensed as a lawyer. They can't be employed by a corporation that is controlled by anybody who is not a lawyer. The y can't enter into contracts with people who are not lawyers or businesses that are not run by lawyers in which they share profits or revenues. So, just basic incentive contracts, you can't enter into those. And, I think that's a tremendously problematic set of rules for the prospect of inventing the kinds of responsive, innovation legal infrastructure that I think we need for a much more complex environment, or even solving a problem that we've had for decades, which is reducing the cost of law so that more people can actually make use of it, make use of legal services. So, I think, that economic regulation that is overseen by bar associations and under the leadership of the ABA [American Bar Association], but the ABA proposes rules and bar associations have to choose to adopt them.

53:33

Russ Roberts: What's it like in other countries, though? Do they have cheaper legal services? More effective legal services? Or does every country tend to have a national organization like this that has restricted innovation in the provision of legal services?

Gillian Hadfield: Well, the American model has been influential. But, one of the things that is really interesting about the cost of legal services in this form--it actually seems to be, it's inversely related to or, you know, directly related to the level of development. The simpler a society is, the more likely it is that more people have easy access to legal help. And, I think--and the lack of ability to access legal services is because the complexity tends to grow along with the cost and complexity of the economy. And, what you'd like to do is say you want really smart legal structure, but smart doesn't have to be more complex and expensive. I think one of the important models to know about here is actually in the United Kingdom, where there are many fewer restrictions on the practice of law. So, in the United Kingdom--and this has been true forever--and that is that anybody can provide legal advice or help draft documents--wills, contracts, etc.--in England and Wales. So, that's never been restricted. And it is restricted to licensed lawyers in the United States. And one of the things that means is, you know, unions can provide legal advice. Community organizations, volunteer bureaus, entities that form, profit- or nonprofit-based, that will provide some legal help, maybe under charitable, on a charitable basis or under contract. So, the United Kingdom has always had a much less restrictive legal environment than we have. But, they've also made changes since 2007 to introduce multiple professions and to really try to take on this problem of making sure that the rules are not being decided by the trade association of lawyers. So, they've deliberately separated out the regulatory function in professional organizations from the trade association function. So, it's--yeah, we are so immersed in it in the United States that it's really important to recognize it doesn't have to look like that. It will look more like medicine. If we look more like medicine, we would--we, law--would have people with different kinds of life[?]. First of all, you wouldn't need a license for everything legal. And we could also have many different types of licenses. Our license is very expensive. It's a 3-year graduate degree, after a 4-year undergraduate degree. And, you know, that's a lot of education. It filters out a lot of people. Well, some of those people could be licensed to provide some basic services--help understanding what a subpoena is, help filing the documents in a family law case. You know, basic assistance to small businesses trying to manage their compliance with local regulations.

Russ Roberts: The way nurses and other medical practitioners--I think the medical field is way to over-regulated, in terms of licensing. But at least there's some variability.

Gillian Hadfield: Right. If medicine was regulated the way law is regulated, every single person who performed any kind of medical care would have to have an M.D. [Doctor of Medicine]. You couldn't have a phlebotomist who is licensed just to take blood. Or, you know, [?], licensed, its relatively minimally intrusive licensing, I think. There's practitioners, chiropractors, pharmacists--all of the--the way law is organized, every single one of those people would have to be a full-fledged M.D. And, you know, law--as I say, a chunk of this doesn't need to be licensed. Which is not to say that a certification system wouldn't still operate, as you mentioned earlier with, say, kosher food, organic food--it might still be, it's still the case in the United Kingdom: anybody can provide you with legal advice; but if you've got the money, you are going to somebody who has been qualified and [?] got lots of great experience as a solicitor to give you that advice. But, if it turns out that the former union rep [representative] who spent 30 years in the union knows a lot about employment and labor law, [?] he's a helpful person to have on the line for 80-90% of the people who have a question about their rights at work. And that's feasible in the United Kingdom. It should be here, too.

Russ Roberts: Do we have any evidence that it's better in the United Kingdom, for everyday people in terms of their access to those services? I assume it's cheaper. Is it? Do we know?

Gillian Hadfield: So, this is a point I make throughout the book: We have very little systematic data about how well our legal systems are working. I think that's another consequence of the fact that it's kind of fallen outside of our usual ways of regulating and left to the professions. And, it's tricky to explore this in the United Kingdom, because they've also had phenomenally generous legal aid, historically--60-70% of the population qualifying for legal aid in all kinds of matters: family matters, housing, whatever. They've cut back substantially: It's now probably, I think 20-30% of the population that can access legal aid. But, one of the reasons they were able to have extensive legal aid is because it was less expensive to provide these services. You didn't have to give the contract to a solicitor working in their own little office. You could give it to a company that was focused on housing benefits cases, for example. One other piece of data we do have is the fact that surveys indicate that people in the United Kingdom facing legal problems--which nobody thinks of as legal problems, by the way: they think of them as housing problems, family problems, misdemeanor problems, small business problems, and so on. A much smaller fraction of people in those circumstances manage those without some legal help; and a much smaller percentage do nothing. Studies in the United States, which again there's not enough good studies, but U.S. study says that people face in those kinds of situations as much as 30-40% just don't do anything in response to them. And that percentage in the United Kingdom is probably between 5 and 10%. The same thing is true in the Netherlands, where legal insurance companies are able to have lawyers on staff who work with people who hold the legal insurance. So, if you hold legal insurance and you've got a problem with your neighbor, you call up your legal insurer and they can put you directly in touch with a lawyer who can give you help with that problem. And, I think 40, 45% of the population in Netherlands has an insurance policy like that. So, it's a very different environment.

1:01:54

Russ Roberts: Let's close with an example that I found very eye-opening as a reminder of sometimes how hard it is to get outside one's normal way of thinking. You make a thought experiment about what if librarians who have degrees in, after all, in library science, were charged with coming up with a search engine. You'd think that that's their expertise: they're good at looking stuff up. And yet, the solution that we have now, which is pretty amazingly great, on, at least the dimensions of finding stuff, of search engines, was not developed by librarians but by computer scientists. Talk about that thought experiment and why it leads you to the importance of being innovative in how we think about making the rules.

Gillian Hadfield: Yeah. So, I think the--what do we know about the ways in which innovation happens, the environments in which innovation happens? We know that they are environments with a lot of diverse participants, lots of different points of view, lots of different ways of thinking about problems. You have a rich, diverse idea pool. You have people who willing to take risks and capital that's willing to take risks. And, if you are really looking for something that's innovative, it's not coming from the established providers. Clay Christensen has taught us a lot about that, I think, with the innovators' dilemma. And, so, the thought experiment there was to say: Look, if you'd left it to--if you had the kind of rules in library science that we have in law, you would have said, 'Look, this is our turf. We are the ones who are responsible for organizing the world's information and helping you find it. And anybody who wants to provide that service needs to be licensed as a librarian and trained in our ways of doing things.' It would have been--okay, we need to get better at classification--

Russ Roberts: It seems reasonable--

Gillian Hadfield: cataloguing. It seems very reasonable. Right. But what we know is that the truly innovative move generally comes in from the outside, with somebody who hasn't been steeped in that problem, saying, 'Huh. How come we don't do it this way?' And, Sergey Brin and Larry Page, they weren't actually looking to figure out how to find information. They were saying, 'Gosh, we have this capacity now with the Internet to access all of this information, and when we go looking and we just do keyword searches, we find a lot of junk. I really just want to know where's the good stuff, where's the stuff that's really important?' And the development of the PageRank algorithm, to develop that, was a solution that maybe librarians--would they eventually have gotten there? I don't know. Somebody told me recently that there was more discussion of this than I realized. But, you know, the path everybody was going on--the path that Yahoo was down at the beginning of the Internet in the late 1990s was cataloguing. They hired armies of librarians to review every single website and catalogue it the way a library catalogs. Well, that just was quickly completely snowed under by the volume of stuff on the Internet. You can't have a human being reviewing everything. So, I would say, 'Look, if we regulated library science the way we regulate law, we would have said only librarians can be doing it.' And I think it's really important--lawyers need to be deeply involved in the process of innovation; lawyers are well-steeped in how rule systems actually work on the ground, and that's critical; and what kind of legal needs are out there. But, we also need software engineers and people who are great at thinking about organizations and people who are great at coming up with better customer service models and pricing models. We need all of those kinds of people involved in developing systems that work better for us. And I think opening up that process is probably the most critical move we can make.

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Rob Reich on Foundations and Philanthropytag:www.econtalk.org,2017://2.152802017-09-04T10:30:00Z2017-09-06T10:32:34Z Is private charity always a good thing? Do large foundations have too much power? Political Scientist Rob Reich of Stanford University talks with EconTalk host Russ Roberts about the power and effectiveness of foundations--large collections of wealth typically created...Russell Robertshttp://www.econtalk.org
Is private charity always a good thing? Do large foundations have too much power? Political Scientist Rob Reich of Stanford University talks with EconTalk host Russ Roberts about the power and effectiveness of foundations--large collections of wealth typically created and funded by a wealthy donor. Is such a plutocratic institution consistent with democracy? Reich discusses the history of foundations in the United States and the costs and benefits of foundation expenditures in the present.

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0:33

Intro. [Recording date: August 21, 2017.]

Russ Roberts: Rob Reich... has written a number of provocative articles on the role of foundations and philanthropy, which will be our topic for today and which we [?].... I want to start with the history of foundations which you touch on briefly in your papers. I was surprised at some of the things I learned from that. Talk about how Rockefeller started, and some of the issues that came up with Congress and the decision about Federal versus state establishing of a foundation.

Rob Reich: Sure. Well, begin with a kind of ordinary observation, which is that philanthropic activity or behavior is time-immemorial: people have been volunteering or giving away money [?] or doing something altruistic or other-oriented since the recorded history that we have. But, the creation of a legal entity known as a foundation, a private foundation that directs private resources for some public purpose, is a relatively new phenomenon. And so the history of foundations in the United States, which really pioneered the form of a private foundation, is, I think, a lost history, unappreciated by contemporary voices today. So, John D. Rockefeller, one of the wealthiest people of the first gilded age in the United States 100-plus years ago, had a mountain of wealth, so large that he decided--as did some of his contemporaries like Andrew Carnegie--to devote a considerable portion of those resources for some public benefit: to become a philanthropist. And, the way to create some kind of charitable trust or entity that had some capacity to direct money for some public purpose was to go off to a state legislature and ask to be incorporated. At that point in time, we were just beginning to see general incorporation laws passed in various states, which allowed either for-profit or non-profit entities to incorporate. At that point in time, in the early 1900s, even the distinction between a for-profit and a non-profit was not a universal or Federally-recognized distinction. So, any incorporated entity needed to seek legislative approval. And, the typical way that any entity [?] profit purposes would be to go off to a state legislature. And, Rockefeller was in New York, so one consideration was to trot off to the New York legislature. But, because he had so much money, and because his preferred philanthropic mission was the very general purpose of trying to improve the prospects of humankind, he was worried that the New York legislature wouldn't look favorably upon incorporation, because the New York State legislature was accustomed to approving philanthropic entities primarily for the benefit of citizens of New York State. So, the attempt was to go off to Congress in Washington, D.C. and ask for a Federal charter to create the Rockefeller Foundation which would operate with this very general mission. And, partly because Rockefeller himself was not universally popular--he was viewed in many respects as having earned a good portion of his wealth through some nefarious means--and then partly there were concerns just about the size of the philanthropic entity he was hoping to create; and he encountered enormous resistance in Congress. So, the sitting President suggested that Congress should turn down the request to create the Rockefeller Foundation; Samuel Gompers, at that point the head of the AFL (American Federation of Labor), said that the only thing that Rockefeller could do in a philanthropic entity would be to create a foundation which would in the course of time teach people how to prevent themselves from becoming like Mr. Rockefeller. And then, from my point of view most interestingly, various people testified before Congress saying that even if Rockefeller had earned the money in a completely legitimate way, and even if you were to ascribe to Rockefeller the most beneficent and magnanimous intentions, that nevertheless, the creation of a large foundation was inimicable[?] to, or repugnant to, the purposes of a democratic society. And, in fact, Rockefeller had to create various types of accommodations in Congress to seek approval. He offered to have a Board of Governance that would include various elected officials as well as the presidents of several Ivy League colleges. He offered to cap the foundation at a certain amount of money--$50 million dollars, if I remember correctly. And he even offered to insist upon a spend-down requirement--that the Rockefeller would have to basically spend out, within 50 years. And this fight, having made various accommodations that would have created a kind of quasi-public-governance model, and a non-perpetual model, for a private foundation, nevertheless Congress still refused to approve the foundation. So, after several years of trying, he went back to New York State and got New York State to approve the foundation, and set up shop from there and more or less did what he wanted, despite the state-level incorporation.

6:41

Russ Roberts: I just want to clarify one thing you mentioned saying Gompers of the AFL--that's the American Federation of Labor, which later merged and became the AFL-CIO (American Federation of Labor and Congress of Industrial Organizations)--for people who might be more familiar with that. So, here's the thing I didn't understand; and it's a legal question, I guess. Now, why did he need a foundation? Why couldn't he just give away money? Right? He could just write a check, which I'm sure he did in his lifetime--he sees a charity that he likes; he writes a check. I guess there's a challenge after he dies--the check-writing activity. Why do you need an organized thing called a foundation with a legal structure? Do you know?

Rob Reich: Yeah. A couple of reasons. I can't speak definitively to Rockefeller's specific intentions here, but more generally to the views of various philanthropists of that day and I think, in certain respects, still today about why the foundation structure itself is important. So, the first is that there was an aspiration started by Carnegie and Rockefeller that the particular purpose of a foundation, as opposed to simply writing checks in a charitable donor form, was that charitable giving, or check-writing was for the direct relief of disadvantage or poverty, or the provision of social services of various kinds. Whereas philanthropic or foundation activity sought to get at the root causes of those problems. And so foundations were imagined as an attempt to try to undertake scientific or social-scientific solutions to the root causes of various social ills. And that was considered to require a professional staff. So, whereas any ordinary charitable donor could of course hire, at his or her own expense, a professional staff to help understand how best to give money away, creating the foundation form helped to make that into, not the effort of a private individual hiring people at private expense to direct philanthropic assets, but rather to create a philanthropic entity itself with the benefit of it being tax exempt, and signaling to the world a philanthropic intention rather than having, as it were, a family office--which wealthy people had then and still have today--to do that work. The foundation was a partially public-facing entity, unlike just a, you know, just a charitable checkbook or the family office of an especially wealthy person.

Russ Roberts: So, today, the tax deductibility of a foundation's activity is very important.

Rob Reich: Okay.

Russ Roberts: And we're going to talk about that. But, in Rockefeller's time, of course, there was, I think, when he established it--the Rockefeller Foundation--there was no Federal income tax. Or am I--was it later than that?

Rob Reich: You've got it right. The proposal to create the Rockefeller Foundation and the actual creation of the Carnegie Foundation for the Advancement of Teaching, the Carnegie Corporation--well that all happened prior to the introduction of the Federal income tax--which came--it came on-line, I think if I recall correctly, 1916, 1917. So, you are right: The tax exempt/exemption for the direction of private wealth into a foundation didn't have any special tax advantages at the time.

Russ Roberts: At the time, couldn't they have just incorporated as a--I don't know what the choices were then, but you'd think they could just have incorporated as a company--

Rob Reich: Yeah--

Russ Roberts: that just happened to have these missions that you talked about. The idea that they would go to Congress for special permission, or the New York State legislature, it just seems weird. I don't mean to suggest there's something incredibly fascinating about it. But it's somewhat interesting.

Rob Reich: Yeah. Well, maybe, I should have mentioned earlier, one additional reason; you alluded to this yourself: Many people sought through philanthropic means to create entities which would last beyond their death. And the creation of a corporation, an ordinary corporate form, would not have allowed donor intent to have been protected in perpetuity. Whereas the--the creation of a charitable trust, but now converted into the form of a private foundation, did allow the legal obligation to honor donor intent even beyond the death of the donor. And, in fact, the default form, the default legal arrangement for a foundation is indeed perpetuity. You know, so, in the usual skeptical phrase: The dead hand of the donor reaches out from the grave to strangle future generations.

Russ Roberts: That's so--what's the right word? Generous on the part of the describer.

11:52

Russ Roberts: So, donor intent is an interesting thing. Let's digress on that for a minute, because it's hard to describe intent. And there's a lot of slippage 'twixt the cup and the lip, for a donor. And the foundation that the donor creates. A lot of people have remarked on the fact that the Ford Foundation and other foundations probably would not make their donors so happy--maybe they didn't describe their intent sufficiently, precisely.

Rob Reich: The Ford Foundation is a special case, because the Ford family formally renounced and removed themselves from the Board of Governance of the Ford Foundation, for a variety of reasons. But was otherwise entitled to a certain governance role. And as Darren Walker, the current president of the Ford Foundation, says, if the Ford family had known that 50 years after the creation or whatever it is of the Ford Foundation had known that a gay black man would be the head of the Ford Foundation, they would certainly be turning over in their graves.

Russ Roberts: So, but this is one of the challenges of donor intent, of course: which is that mores, norms, attitudes change. Rhodes--the one I was thinking of was the Rhodes Scholarship, which was designed for young men. At some point in the last 25 years, I don't know when--maybe you know, they decided to open it to women--even though it very explicitly says in the charter that it's for men only. There's no--this isn't a question of: 'I wonder what the donor would have wanted.' It's written down. And yet, either because--I don't know who would adjudicate such an issue--the heirs? Could the heirs sue to have the ancestor's intent changed? Could the heirs sue if they didn't like it, that it had changed? That the Directors are doing something different? Do you know the answers to those questions?

Rob Reich: Yeah. I think any of the above. So, if the current Board of Trustees of an entity wishes to change the donor intent, the Board of Trustees could, as it were, sue the heirs of the initial donor in order to re-direct the mission. My--I'm no legal scholar, but my loose understanding here is that such attempts are rarely successful, except in cases where, because of changing social conditions and indeed laws, whatever the initial donor intent had been, is now either illegal or perhaps socially frowned upon--as in the case of the Rhodes Scholarships. In other cases, various outside entities--say, the beneficiaries of the philanthropic entity--might sue the foundation or the trust to have the purpose changed somewhat. And then in that case the Board of Trustees could in effect defend the donor intent, honoring the mission of the donor.

14:49

Russ Roberts: So, one thing that we know for sure is that foundations have become a lot more common in the last couple of decades. And a lot bigger. So, talk about some of the numbers there.

Rob Reich: Yeah. So, the number of foundations has gone up dramatically over the course of the past generation. And, you know, here, I just think it's a consequence of the rise of inequality in the United States; and we are living in what you could call the Second Gilded Age. And, the number of people with extraordinary wealth has gone up dramatically. And, for, you know, familiar economic reasoning, the marginal utility of an additional dollar when you are a billionaire is pretty small for personal consumption. And people are inclined to direct a considerable amount of money for philanthropic purposes. So, my recollection of the most recent numbers is that, if you went back in time about 20 years ago, we had something on the order of between 20,000 and 30,000 private foundations in the United States. Now it's more than double. And the number of new foundations on the scene--like, for example, the Gates Foundation, but not only--new tech wealth has brought in a large number of donors who are giving at earlier stages in their careers, at younger ages. And often, trying to direct the wealth in more specific ways. So, the tech wealth has created--especially out here in the Bay area--a large number of new foundations with active and engaged donors at the helm of that money--so you can[?] create various forms of a public benefit or social policy change.

Russ Roberts: You say, in 1930 there were about 200 private foundations, and their assets were less than a billion dollars. Of course, there's been a lot of inflation, but it's now over 100,000 foundations as of 2013, and they are worth more than $800 billion. I just want to--a pet peeve of mine is a precise use of the word 'inequality.' So, you mentioned inequality: but it's really just that the richer people are richer than they were before. It doesn't necessarily mean there's more inequality. There is, probably. But it could have been we all got a lot richer but it didn't turn out probably to be the case. But it's true that the most successful people are more successful than the most successful people generations ago, and therefore there's a lot of extra money that they are willing to give away. Which is, one would think would be a good thing.

Rob Reich: Mmmhmm.

Russ Roberts: But you raise the possibility it's a bad thing. Which I thought was really interesting; which was why I wanted to do this interview. So, what's--it sounds great: all this generosity. As you write, in your article in the Boston Review you say:

Shouldn't we be grateful to the person who devotes his private wealth to public purposes, rather than consuming conspicuously or passing his wealth to children and relatives?

And so, what's wrong with that?

Rob Reich: Right. Certainly, I think the natural attitude today is that what citizens or ordinary folks owe big philanthropists is a simple gratitude. Because, even if the money were somehow to be wasted philanthropically, what the philanthropist always can say, in her defense, is that, surely it's better to have tried to have done something philanthropic than to have simply engaged in more private consumption. Especially--

Russ Roberts: than a yacht[?]--

Rob Reich: Especially if you are a billionaire. Yeah, and you know, so I have a couple of Reponses. In certain respects the overarching ambition of the stuff I've been writing is to try to sweep away that very attitude. I don't believe that what private philanthropists or, excuse me, what philanthropists are owed is nothing but gratitude. And so, I'll tick off a couple of thoughts about that. So, the first is that, especially when we are talking about big-philanthropy people with extraordinary wealth who attempt to convert private assets into some public influence: Um, philanthropy constitutes an exercise of power. And in a democratic society, power deserves scrutiny, not simple gratitude. Now, notice I haven't said that that power is illegitimate to wield, or that that power can't be used for good purposes. I think it can be used for good purposes. But the relevant question is to pay attention to the power and to direct some, um, questions and various types of scrutiny rather than just simply congratulate this exercise or be grateful for its exercise. Beyond that, I think that private foundations in particular are rather idiosyncratic, very peculiar organizational forms or corporate bodies, because they are marked by almost complete lack of accountability. So, just because it's the most familiar thing to refer to these days, the largest foundation in the world is the Bill and Melinda Gates Foundation. Foundations--unlike their corporate peers within ordinary marketplace, for-profit firms--foundations have no marketplace competitors. There's no rival foundation attempting to put the Gates Foundation out of business. To the contrary: there's no competitive dynamic from rival firms. Or, for that matter, from consumers, who could fail to purchase the products that a for-profit firm has on offer. In the case of foundations, there's no consumer: there are supplicants. There are people who are clamoring for the attention of the donor, rather than potentially seeking to hold it accountable in the ordinary marketplace ways by not purchasing something. And then, the alternative here to the marketplace would be various public agencies or government. And government, which spends a budget money and in various ways has familiar systems of democratic accountability through the ballot box, so that if any of us citizens, we don't like what the local school board is doing with public funds for education or the, our state legislature in terms of its allocations for education--we can elect some new people at the next electoral cycle and try to put people in place who have our preferred preferences. But, you can't do that with a foundation. So, you know, as the critic Diane Ravitch says, at the Gates Foundation: Bill Gates serves as the unelected school superintendent.

21:35

Russ Roberts: Yeah--it's--I had Diane on as a guest a while back. And it's a great line. It's a little bit misleading. I want to just respond to your point about accountability. Which is: It's clearly true--that there's not much accountability in a foundation if you don't like it. You can refuse to accept gifts from them. You could argue that that's a sufficiently high level of accountability, since they have no power to take money away from me. They only have the power to give it away. Which is somewhat different, I would say, from a competitive enterprise in a free market system, which has the accountability of consumer choice, and the freedom not to buy the product. So, it's a little bit different. And then, in the case of the School Superintendent--of course, an actual school superintendent doesn't have that much accountability, unfortunately. My vote at the ballot box is an incredibly weak reed to lean on. We did have Chris Blattman on recently complaining about some of the initiatives of the Gates Foundation--he wrote an open letter, which disappeared into the ether. And we joked about that. So, the ability of people to influence the Gates Foundation is--there is some ability, but it's very limited. And it's more limited, I would accept, than the ballot box. But it is different, because that school superintendent forces me, through my taxes, to pay for the education of the children around me; but if I don't agree with it--whereas, Bill--Bill only exploits me in another way. Which you wisely point out. Which is, he forces me to--he can force me to subsidize his foundation through tax-legal--the way the tax system is set up: through a tax subsidy. So, respond to me if you'd like, to that little rant. And then talk about why the tax issue makes it a little more relevant.

Rob Reich: Let's get to the taxes thing in a minute. Let's just go with the completely appropriate observation you make, an important observation, that perhaps a sufficient form of accountability for foundations is that the actual transfer of philanthropic assets from a foundation to a grantee is an ordinary contract. And at the moment of contract, the recipient is voluntary and can refuse to accept the donation. So, I grant that entirely. I wouldn't say, however, that that's a sufficient form of accountability, in part because let's call it a power imbalance that exists traditionally between especially large donors and the array of needy nonprofit recipients all clamoring for the attention of the donor. In other words, here's, I think, a roughly analogous situation: Imagine a case of a wealthy person now not interested in philanthropy but interested in transferring money to his or her kids; and so the parent sets up a trust for the child, which unlocks over various life stages with some strings attached at each point. And says to the kid: Here's what I'm going to make available to you. Here's some money at the age of 18, the age of 25, the age of 35--whatever it turns out. And, sure, the kid could refuse that paternalism exercised over him or her by saying, 'I don't want any of your inheritance,' because that's a similar moment of contract. But, the power that a parent wields over a child, especially, as you say, where the benefit is money that would be difficult to come by otherwise, is rather large. So, one nice thing would actually be empirically: how often does it happen that a grant offered or extended by a foundation is at the moment of potential contract refused by a recipient? I don't have that data. I'm not sure anyone does. But my guess is it happens with extraordinary infrequency.

Russ Roberts: Of course. I agree with that. I think the issue is: What strings come with it? And that would be true of the parent, too. The parent, through the prospect of making a bequeathing someone's estate to a child, has influence over them long before the gift is made.

Rob Reich: That's true.

Russ Roberts: A friend of mine--his father--and he's a listener to EconTalk, so I don't know if he'll catch this--his father allegedly kept a loose-leaf notebook for his children's inheritance for the will, and if any of his children misbehaved, he would just shuffle some pages out of their section into one of their siblings. Now, I don't know that--I love that; I think that's hilarious--and I don't know if that's apocryphal or true. But perhaps he'll let me know. Maybe he doesn't know if it's apocryphal. Maybe it's a threat you had to wonder about. So, it's true that the prospect of money changes people's behavior. And, you allude to it in one of your articles. I heard it firsthand from a foundation officer who said, after rising to his position he was told, 'Congratulations. You'll never get an anonymous compliment; and you'll never pay for dinner for the rest of your life.' Yeah--I ruined that joke because it should be the other order. But--

Rob Reich: Exactly. But I wanted to add that, you know, another kind of anthropological or sociological observation that people who previously were the grantee side, working for a nonprofit who crossed the street and become the program officer at a foundation, is that overnight they become much more intelligent, much [?], better looking than anyone in the room.

Russ Roberts: Yep. Jokes get funnier. It's incredible. Must be something about the position. As we know it is.

27:41

Russ Roberts: But, it raises a very interesting thought which I hadn't had until we talked about it. Which is: Now, I can't choose--I can't go to a different parent. But I can go to a different foundation. And, it's an interesting thing--we were talking about strings earlier--if the foundation puts strings on their money and the recipients don't like those strings, they can go to other places. There is competition in that sense. So, that's some of the--that insulates the recipients from the coercive power of the foundation to some extent. But having said that, there's no doubt that the prospect of getting money changes your behavior and gives power to the donor. I would also add, however, that I've seen some very wealthy people in my time--not very often; a couple I've--I've probably stood next to a couple of billionaires in person. And, one that I'm thinking of was extremely uncomfortable being out in public, because he must get asked constantly for money. Because he's very generous, and he's very philanthropic. And I just noticed how uneasy he was. And, it's interesting, right? It's sort of the flip side of power. You'd think having money gives you power--and of course it does. But it also comes at a price.

Rob Reich: I agree. The social awareness that people who are philanthropists have an extraordinary capacity to give money away creates a social dynamic of people who are supplicants, for the most part. Or, just as you said before, you are always uncertain who is being honest with you and under what circumstances. All things considered, you know, I'd say I have only tiny violins to play for [?]. But, I don't deny the observation.

Russ Roberts: Yeah. I think I've read it before on the air, but Franklin P. Adams wrote a very nice poem about this. I think it's called "The Rich Man," and I will not try to read it live from memory. But, we'll put a link to it.

29:49

Russ Roberts: At any rate, so there is some power. But it's only the power of being a fount of money. And the question then is the tax issue. So, talk about how the tax issue comes into play and why for some people that gives us some, as a society, some ability to regulate or at least to have some say in the way foundations are run.

Rob Reich: Right. So, if it were the case that philanthropy--and here, I'm talking about both big philanthropy and a private foundation, but also ordinary charitable giving of the sort that you or I do, making a $100 donation to our preferred nonprofit recipient--if it were the case that such giving were just the exercise of our liberty to dispose of our legitimately-earned assets or money, how we saw fit, then, you know, whatever your preferences, Russ, about the array of organizations you want to support, and whatever my preferences were, we could just say we were exercising our liberty to do with our wealth what we wish. But, given that there are tax incentives attached to the creation of a foundation or the donation of charitable dollars, the existence of tax expenditures for a philanthropy makes it not quite the case that we are simply exercising our liberty. I think it's more accurate to say that there is a tax incentive to stimulate the exercise of our liberty; and, then our charitable donations or philanthropic gifts are partly public and partly private. So, let's just be concrete about this. The way the tax incentive works is a deduction, not a tax credit, means that the higher up the income scale you are, the greater the public subsidy attached to your charity. So, if you are in the 30% tax bracket, if you make a $100 donation, it actually costs you $70; and $30 of your tax burden would be foregone. Which is to say: the IRS [Internal Revenue Service] collects less money; and, whatever fraction of the benefit that each of us receive as an individual from the spending of public dollars, we receive less of it. So, every single one of us as citizens subsidizes the exercise of philanthropists of all stripes. And that gives the public, it seems to me, an interest in what philanthropists do with their money. I haven't said it's obvious what that interest amounts to, but I think it is obvious when people say, 'God damn it, it's my money and I'm going to do with it what I want'--well, only if you are not taking any tax advantage for the philanthropic direction of that money. Because when you get a 40% tax break--or more in some cases--then it's not quite accurate to say that it's just your money and you can do what you want with it.

Russ Roberts: Yeah. I find that argument unconvincing in one dimension. In some dimensions it's absolutely right. And you tell that great story about George Soros saying, 'It's my money. I can do whatever I want with it.' And a staffer says--go ahead, tell the story.

Rob Reich: Yeah. So, in the final days of creating the Open Society Institute and associated foundations, there was disagreement amongst the staff that Soros had hired about exactly what their program areas, or areas of focus would be. And, to resolve a disagreement, Soros allegedly slammed his fist on the table and said, 'Well, at the end of the day, it's my money. We're going to do it my way.' And a program officer that he'd hired said, 'Well, actually Mr. Soros, about 30% or 40% of it would have been the taxpayer's money. So, I think some other people actually have a say in what you do, here, too.' And he was fired the next week.

Russ Roberts: Yeah. Not surprising. Because it was, at least in some dimension, his money, in terms of who he hired and fired in the [?]. But, I think it's a fascinating philosophical issue for me, because it opens the door to the argument that we--some measure of 'we'--should have a say in that money. And my view is, is that you either make it tax deductible or you don't. If you make it tax deductible, then it's a--what restrictions you put on the foundation should stand or fall on their own merit, not just on the argument, 'Well, it's our money, too. We get to have a say.' I think the relevant question is: Are those restrictions good or bad? So, for example, and we'll talk about them in a minute, various ideas of transparency, various ideas about accountability, various ideas about timing--whether it should be perpetual or not: those are all interesting questions that, I think are important and have impacts. But they aren't just in and of themselves by the fact that the political process has decided they should be tax deductible. Now, you could argue that if you want to have no strings attached--and no one's going to argue this, either, except maybe a few people--but you could argue that if you want no strings attached, then don't take the deduction. As you said. And so, in the old days, there was no tax deduction, because there was no income tax.

Rob Reich: Right.

Russ Roberts: And I think even though I'm a big fan of civil society and private initiative and voluntary solutions from the bottom up rather than the top down, I think, you know, I think there's a lot to be said for not subsidizing foundations, and not subsidizing charitable donations. I know there's an argument to be made for it. I know what the argument is--that it overcomes a free rider problem. And that's all true. But I think that's not--again, even that's not enough, either. That doesn't prove that it's good to have tax deductibility. As you point out, it gives very wealthy people large control over large amounts of money that are much larger than they otherwise would be, because of this tax policy.

Rob Reich: Right. And, I would say, the kind of conventional argument on behalf of the tax incentives is the deduction is that it will stimulate more philanthropy than would be the case without the deduction.

Russ Roberts: Yup.

Rob Reich: Well, that's not a question that's going to be resolved philosophically. That's an empirical question. And, to the best of my knowledge--and I've checked into this--economists who have studied this have a kind of mixed record to report on whether or not the tax incentive actually kicks out more money than we've given otherwise. So, it's an open question whether or not that particular defense will carry the day. Many people give money without even thinking about whether there's a tax benefit for it. And, you know, just one small thing here--this is less about big donors than about small donors--given the, you know, the complicated structure of the U.S. tax code, the ordinary person only itemizes after a certain level of income.

Russ Roberts: Correct.

Rob Reich: And it's only when you itemize your charitable giving that you can take advantage of the deduction. Otherwise you just take the standard deduction. So, my best recollection is that, as of a couple of years ago, something on the order of 70% of all tax filers just take the standard deduction. So, there's no incentive in place for them just for charitable giving in the form of a tax deduction. And yet, the overwhelming majority of Americans, something on the order of 90% of people, make charitable donations every year.

37:55

Russ Roberts: Yup. And I think the argument, which you started to elaborate on--you mentioned it but you didn't elaborate on it much--is that, 'Well, some charity is good; more charity is better.' And that just doesn't follow--again, even though I'm a big fan of civil society, if I don't like what Bill Gates is doing or Mark Zuckerberg, why do I want more of it? Why do I want a small group of people deciding where large sums of money go? Now, I happen to believe in the personal liberty side: I'd much rather see an elimination of the tax deductibility and let people be free to spend where they want. But, that's a philosophical question and let's put it to the side. Having said all that, you then talk about, I think, two very thoughtful and insightful arguments in favor of foundations. You call them pluralism and the discovery argument. Talk about each of those, please.

Rob Reich: Yeah. Good. So, to put this provocatively, perhaps especially for folks listening who are engaged in philanthropy themselves, I front-load an awful lot of the things that I've written with deep skepticism that big philanthropy can be made compatible with the expectations of democratic governance. Why is that? Well, for the kind of trivial reason that big philanthropy represents a plutocratic element--by definition: you have to have large wealth in order to create such an entity if you want to[?] a large private foundation. And when you are converting your private assets into some sort of public influence, you are just inviting, now with the tax subsidy on top of it, a relatively unaccountable, non-transparent, powerful form of foundation activity in a democratic society. And so, what I think is possible is that plutocrats can be domesticated to serve democratic purposes. So, that's the orientation I take to the question. Another way to approach this is just to say that large inequality is just a standing feature of any political order; and in a democratic society, one task of democratic institutions is to try to make the wealthy elite serve democratic aspirations rather than subvert them. And, I think that there are certain ways in which private foundations and philanthropy can in fact serve democratic purposes; and it's through the mechanisms you just alluded to earlier. Namely, a pluralism argument and a discovery argument. So, let me take those in order, very briefly. If philanthropy amounts to the creation of various forms of public benefits or social benefits through private means, it's a healthy thing in a democratic society to partially decentralize the production of social benefits, so that it's not only legislatures spending the money of taxpayers through ordinary democratic means that creates public goods or public benefits. Those are important mechanisms, but they shouldn't be the exclusive mechanism for the production of social benefits, for a variety of reasons. Most cheaply, in a democratic society where legislatures operate through majority vote, you'll have minority preferences permanently disenfranchised from their preferred social good production if they always have to assemble a majority in order to get the expenditure of taxpayer dollars. So, by partly decentralizing the production of social goods to philanthropists who are given the permission to have their idiosyncratic donor preferences manifested in what gets funded, then minority groups or minority preferences will have a means to see some of their own social good production. And, when you aggregate that across all donor preferences, you get pluralism in civil society. And that is, in my view, a very healthy thing--possibly even a foundational constitutive element of a flourishing democratic order. So, that's the pluralism argument. The discovery argument has to do with large foundations in particular. And here, it again starts from the apparent vice of unaccountability foundations have. And what I try to do is find if there's a way to convert that vice into a certain type of virtue. So, the vice is that there's no marketplace accountability for a foundation, and there's no democratic or public accountability in the form of elections: no one can unelect Bill Gates or any other board of trustees from the foundation, and there's no marketplace competitors, as we said before. So, in practice what that means is that foundations have, if not the unique permission, at the very least an incentive structure that makes them distinctively able to pursue very long time-horizon social experiments. Things that would take 10 years, 20 years, or longer, where you'd see the benefit of some, you know, social investment or innovation. That time horizon is ordinarily not available in the for-profit marketplace or the ordinarily short-termism of the stock market and investors' patience. Similarly not available in public agencies because of elections, where people have to show, elected officials have to show, typically some benefit to citizens within the cycle of election in order to be re-elected. And the short-termism that's present within the marketplace and in government is not present in foundations--in virtue of their unaccountability. They can take a long time-horizon view. So, if foundations were to be one site in which there's experimentalism around social policy, where successful innovations are subject to social scientific testing, they are demonstrated to be useful in some important way or effective, and then presented, as it were, to a democratic public for scaling up to the benefit of all citizens, or many citizens--that's a completely salutary mechanism for a democratic society. It's a way of insuring that democracies are currently alive to new social conditions and experimenting so that social policy can adapt to change in conditions. And, if we can partly decentralize that experimentation, that's a healthy thing for democratic order.

Russ Roberts: And you give a couple of examples of where private philanthropy brought about some really dramatically great things.

Rob Reich: Yeah. The classic example is the Carnegie Library system. Andrew Carnegie didn't say, 'Hey, here's a great idea: I'd like to fund libraries open to the public in perpetuity for any citizen or, you know, community that wants one.' He pilot-tested a whole bunch of them, partially funded them along with various, you know, cities. And then, after citizens experienced them, the Carnegie Foundation doesn't fund every single public library across the country now in perpetuity. It's now an ordinary public expense. It's been taken often by taxpayers as an ordinary public good that cities or states should fund. And there's other similar examples of that particular kind.

Russ Roberts: I can't help but note, however, though, that as we get much wealthier as a society, and as unfortunately, I think, or maybe not--I don't know--but we seem a little less interested in books. Some of us.

Rob Reich: True.

Russ Roberts: We still have libraries. I'm not sure there's a good case for a public library any more. It's now really a place for people who have trouble getting Internet access. Which is a nice thing. It's not the worst thing in the world. But, the book part of public libraries has fallen apart, fallen down.

45:58

Russ Roberts: I want to come back to your point about pluralism, because I thought that was really beautifully said. And it reminded me of a couple of things; I'd like to get your reaction. One is--it reminded me of how we make the case sometimes for capitalism or for socialism. You don't want just a few kinds of cars. Some people argue capitalism gives us too many choices. I'm not one of those people. But, it's really a remarkable thing that, if you have a large family, there's a car for you; if you want to drive a sports car, there's a car for you. If you want gluten-free bread, it's there for you. So, there's lots of choice in a free market society. And similarly the foundations add to the choice: that, for socially beneficial activities, and minority preferences, it's a really cool thing and extremely important. It also reminded me of the fact that--I think I heard this from Milton Friedman--that, in an authoritarian state, wealth is dangerous because it allows the funding of alternatives to the state; it allows the funding of threats to the state. So, there's a certain protection from authoritarianism in the form of wealth. I never thought I'd make that argument. And it's a little bit creepy. So, I just think it's a variation on your point--I think, if I understood it correctly.

Rob Reich: Yah--

Russ Roberts: It's a little bit of a bulwark against tyranny.

Rob Reich: That's right. Private wealth, in that very narrow sense you just described, can serve as a form of countervailing power to a tyrant.

Russ Roberts: And yet--and you make that case, and it's beautifully made--and I think that I also love your point about innovation--at the same time, you also recognize that I would argue this is a big concern for those of us like myself who think that philanthropy could have a much larger role: if government stepped out of the way, there'd be less crowding out of private charity; there'd be more giving if government did fewer things. One has to confront--I have to confront--the reality that a lot of foundations don't seem to make that big a difference.

Rob Reich: Yeah--

Russ Roberts: They don't seem to perform so well. And you raise that issue. Talk about that.

Rob Reich: Yeah. Well, so, one of the consequences of the view I just described, and particularly this discovery argument, is that the role of foundations, perhaps against expectations now, is precisely not to try to fund ordinary social services that--especially in the case where they were once provided by the state. So, as the state has budgetary problems and seeks to offload some of the provision of public services to private means, in particular philanthropy--well, that's not social innovation, or experimentation. That's just finding a different way to, to, divert the cost of a social service to some type of private means. And, what that means in practice for me is that foundations--if you have a foundation and you are making a grant of money to the local soup kitchen, or, you know, to, I don't know, some type of--in my case, I've written about the use of private money going to already-wealthy public school systems, local education--

Russ Roberts: yep--

Rob Reich: foundations and the like: that's in my view an example of the most regrettable kind of philanthropy. Because it's philanthropy in the service of exacerbating existing inequalities at the level of social services, where the public has already assumed a responsibility for their provision--the public school house. And so, what that's a case of, is that, you know, parents take a tax deduction for the worsening of an inequality that the state in my view is already responsible for remedying. And, in so doing, think that they are noble for having engaged in the activity--

Russ Roberts: yep--

Rob Reich: --a kind of psychological perversion on top of it all. So, when foundation money goes toward this genuinely long-time horizon, risky undertakings of new social experimentation, that's a salutary thing. But not in the form of public service provision of the kind that's familiar already. Charitable giving might be fine for that: You know, the hundred-dollar checks that you and I write. But we're not exercising huge power in doing that. But, if you have a foundation, you shouldn't be doing that type of work. Let me try an analogy on you that I've given on a couple of occasions. So, when I give a talk to people who work in foundations, there's ordinarily some who are quite resistant to the criticisms I have to offer.

Russ Roberts: Huh. You're kidding.

Rob Reich: [?] Stop it[?]. Um, I've tried, sometimes, beginning in a different direction. I'll say to people I want to talk about the very eccentric organizational form of the private foundation, the legal codification, promotion of voices in a plutocratic voices in a democratic society. Before I get to that, let's talk about an organizational or institutional design that I, as a professor, enjoy, that most people think is indefensible. And that's the existence of tenure.

Russ Roberts: Yeah.

Rob Reich: Which is job unaccountability for the rest of my working life. So, you know, short of breaking criminal laws or somehow abridging my contract--which requires me to teach a few classes--you know, nothing that I do with my research career could cause me to lose my job at this point. And, again, I think the ordinary attitude that most people have is that that's a preposterous institutional design, to be unaccountable for your job performance for life. And, what I often say to people is like, is, 'That's basically the institutional design of an endowment.' And, in fact, the design is not for life but for perpetuity. No accountability for the performance of the endowment over the course of eternity. And donor direction, just as I have, you know, just as intellectual direction of my own research interests. So, what I ask people to be the defense of tenure? And there, I think the answer might have something to do with free speech protections--but leave that aside for the moment. And it has something to do with the kind of long-time horizon research experiments that scholars will take with the protection of tenure. So that if I want to try learning two different languages, immerse myself in some other, you know, environment for a long time, or study for 20 years to try to solve some mathematical proof, or, you know, become the world's expert on a single animal species--then, you know, write up my work, in a peer-reviewed way that contributes to humanity's storehouse of knowledge: That's the kind of research activity that's not likely to be undertaken in the private marketplace or in public governments. A lot of it will amount to nothing. I'm not, you know, wildly optimistic that all of the research activity of tenured professors is a truth-tracking or a contribution to knowledge. And, let's say 75% of it amounts to nothing. But the 25%--or pick a number of your choosing, that does, is an important contribution. Now, here's the rub: If what I did as a tenured professor was to do small-ball[?], modest incremental contributions to knowledge or commentary in this paper, an additional little thing here and there--well, just put me on a 5-year renewable contract and nothing about my output or anybody's output changes. If tenure is a justifiable institution, then, um, I've got to be engaged in risky, long-term-horizon research projects. A lot of which will fail. But the design of tenure, for some people, will prove to be quite socially useful. So that's the analogy I draw to a foundation. If foundations are doing really tiny, risk-averse, you know, modest social contributions that aren't especially innovative and aren't long time-horizon, then you don't need the institutional design of the foundation. Just make a donor [?] and write some checks. So, tenure and the form of private foundation are justifiable in light of their long time-horizon, experimental permissions.

54:46

Russ Roberts: Yeah. And as somebody who is not particularly a big fan of tenure and who really likes the idea of a foundation, I'm in trouble either way. I'd have to--I think--when I look at the empirical evidence--I don't see a lot of evidence that tenure actually generates those long-horizon projects. In fact, it tends to induce the opposite. To get tenure, you have to publish a lot of articles, and try to be influential as quickly as possible.

Rob Reich: Right.

Russ Roberts: So, certainly, when you are pre-tenure, you tend to do very unambitious things. And now, once you have it--now it's suddenly: 'Oh, turn that switch off.' And it seems to me that a lot of academics don't get out of that habit. But, even, I think--that's just a cheap shot--not a cheap shot, just an easy form of low-brow scientific observation. I think the much bigger problem is that the people who go into academic life are not particularly risk-taking. The idea that they would find this post-tenure environment or the life-with-tenure environment exhilarating for the freedom to do bold and brash things clashes with the psychological makeup of most academics. There may be an exception or two, or ten, even, maybe, in which case it may be that those 10 do enough that's worthy that it--

Rob Reich: Justifies the whole--

Russ Roberts: Justifies the whole thing. Although it may also be the case that their passion would be fulfilled no matter what: they would work in some garret out of love for their subject and a pittance without the need for tenure.

56:29

Russ Roberts: And so to come back to foundations--and, by the way, I love the analogy. I think it's very clever--forgetting to open their mind to your ideas. But I think, similarly, there's a problem with foundations that it can often attract people who are not risk-takers, who aren't entrepreneurs. They are doing something else, typically. And I've talked about this before on the program. I think a lot of nonprofits struggle with mission creep. They start off passionate about the goals of the foundation, and about the power of innovation. But, after a while they tend to focus on just getting their budget larger. And, I think the challenge for those of us who think that foundations could play a much larger role in civil society, is to think about ways to innovate their performance. Someone who works on that, I think, in a very thoughtful way--I don't know if you've read his work--is Dan Pallotta, who has been a guest on the program.

Rob Reich: Yep. Yep.

Russ Roberts: And so, I think we really need to try to try to revolutionize something of this world for it to have the impact it could have.

Rob Reich: Yeah. I agree. I'm also, um, like you, not optimistic about the actual performance or behavior of most foundations. Especially, as you drop out of the largest and most familiar. I mean, the vast majority of foundations are relatively modest in size--you know, a million dollars or less. And those tend to be entities which are mainly ways of employing your children or your extended family, um, to bring together your relatives for intergenerational family value transmission. And, to have some, you know, enhanced social standing. I'm being a little bit skeptical or cynical there. But, if you have a million-dollar foundation which has a 5% annual payout rule, where you are employing a bunch of relatives, the amount of money actually going out the door annually for social good production is pretty modest. And you could accomplish it just by writing charitable checks every year, and forego the form of the foundation. And I think that could be socially better, um, um, um, than the existence of foundations.

58:37

Russ Roberts: Let's close with any observations you might have about what else we might do to improve performance, in your view. So, you just mentioned something we hadn't talked about before: I think all foundations have to spend at least 5%--what is it? 5% of what?

Russ Roberts: So, it allows for the possibility of growth, because most of the endowment is presumably invested. So--and of course some foundations are larger than when they started, because they earn more than 5%; and they only adhere to that 5% rule. And they tend to be very focused on keeping the principle intact.

Rob Reich: Yeah. They seek to exist in perpetuity.

Russ Roberts: But, we should mention, there are foundations that do establish themselves with a write-down and death-date, to make sure there is no drifting of donor intent. Right?

Rob Reich: That's right. The Gates Foundation is perhaps most prominent. It has declared that it will go out of existence--I think I have this right--within 40 years of Bill and Melinda's death, the Atlantic Philanthropies just close shop, sun setting--one of the larger foundations that existed. And then is it the Olin[?] Foundation that did something similar?

Russ Roberts: Yep.

Rob Reich: So, we do have some examples of foundations that sunset entirely. Sometimes, because, as you say, donor intent is the chief thing; and even a relatively narrow board of governance, of, you know, chosen successors is not trusted to honor donor intent. But, also, for the ordinary, and to my mind, much more persuasive reason, that there are sufficient social problems worth working on today and which future rich people can take care of--unspecified future problems.

Russ Roberts: Yeah. I think it also prevents what we might call calcification, which is the phenomenon I'm talking about, where, it becomes a pleasant place to work rather than a way to save the world.

Rob Reich: Right.

Russ Roberts: But, going back to the policy issue: Is there anything that you particularly think we ought to be doing differently in this area, to increase accountability? And if so, what might it be?

Rob Reich: Sure.

Russ Roberts: And performance, not just accountability.

Rob Reich: Okay. So, start again with a kind of counterintuitive point: I think there should be floor on the size of foundations, not a ceiling. I don't have a particular number, but let's say, $10 million or $25 million dollars. If you don't have that much money, then just create a donor-advised fund and make some distributions from that. In terms of performance and accountability, I'd like to see more transparency in the reporting that's done about grant-making. In particular, if your foundation is large enough to have a professional staff that's making evaluations of the grants out the door, and perhaps you even have a larger strategy that you are trying to deploy--so, it's not just the effectiveness of any particular grantee that you are measuring, but you are measuring the effectiveness of your strategy as a whole: Well, now you are engaged in something like knowledge production, yourself. And, too many foundations house their evaluations as, you know, kind of proprietary information, only occasionally to the benefit of the grantee and almost never to the benefit of the public. So, I'd love to see foundations that made annual reports that shared their own organizational learning on the basis of what they've been trying to carry out. And then, even more dramatically, I would love to see some experiments--here, I am taking advantage of the analogy to tenure--I would love to see some experiments with peer review. Not a--you know, not a legal accountability structure that's demanded. But, I'd love to see some large foundations experiment with various forms of peer evaluation of how the grant-making strategies of how their peers are going, using, you know, various forms of ordinary social science to make that public.

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Where has all the Parking Gone?tag:www.econtalk.org,2017://2.152752017-08-31T16:55:16Z2017-08-31T17:45:36Z What will the cars of the future look like? Will they resemble the teacups at Disneyland? How long will it take us to stop referring to "driving" when humans no longer do? (Think about how seldom you use your...Amy Willishttp://www.econlib.org What will the cars of the future look like? Will they resemble the teacups at Disneyland? How long will it take us to stop referring to "driving" when humans no longer do? (Think about how seldom you use your phone to "phone" someone...) And what will be the fate of all the parking lots and garages of today? Will they be used for other purposes or replaced entirely?

These are just some of the questions that come up in this week's EconTalk episode with Benedict Evans of Andreessen Horowitz. Evans suggests that we have a difficult time making predictions about the future when we extrapolate from that with which we're familiar today. But let's give it a shot...We always love to hear your thoughts.

1. As we move from the cars of today to autonomous (Evans dislikes the term "driverless") vehicles, which elements will become more expensive and which less expensive? Which complementary industries will be most affected, and why?

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2. What does Russ mean when he says, "A Prius is really a coal-powered car?"

3. To what extent will the autonomous vehicle future be accident-free? Explain.

4. Both Roberts and Evans note that the incidence of drinking and driving has declined since the advent of on-demand transportation, such as Uber. But Russ goes further and asks whether autonomous vehicles might lead to more drinking. What do you think?

5. What sort of privacy concerns are raised by autonomous vehicles? Would livestream vehicle cameras, for example, be a net gain or loss for individual liberty?

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Benedict Evans on the Future of Carstag:www.econtalk.org,2017://2.152642017-08-28T10:30:00Z2017-09-09T09:42:59Z Benedict Evans of Andreessen Horowitz talks with EconTalk host Russ Roberts about two important trends for the future of personal travel--the increasing number of electric cars and a world of autonomous vehicles. Evans talks about how these two trends...Russell Robertshttp://www.econtalk.orgBenedict Evans of Andreessen Horowitz talks with EconTalk host Russ Roberts about two important trends for the future of personal travel--the increasing number of electric cars and a world of autonomous vehicles. Evans talks about how these two trends are likely to continue and the implications for the economy, urban design, and how we live.

Taleb on Black Swans. EconTalk. April 2007. Discussion of difficulties when trying to make predictions.

Highlights

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0:33

Intro. [Recording date: July 27, 2017.]

Russ Roberts: Today we're going to be talking about the future of the car, based on a very provocative and lengthy blog post that you wrote on the rise of two things that appear to be transformative for that industry--which are the electric car and the driverless car. And what I loved about the post--it was a beautiful example of one extremely important aspect of what I call the economic way of thinking, and that I associate with George Stigler and Thomas Sowell. And that is: And then what? That is: Something gets put in motion. Something happens. Something changes. And a lot of people think, 'Well, that's the end of that.' And, what a good economist does, and what you did in this blog post, is start thinking about, 'What are going to be the implications for a much wider range of stuff?' In particular about the consequences of more electric cars or more driverless cars--what you call second- and third-order effects. So, I want to get started with electric cars. How might they change things?

Benedict Evans: Well, I think there's sort of, there's two sets of things to think about here. The first is that the electric car doesn't so much as get rid of the gas tank as kind of rip out the spine[?] of the car. So, it's not that you get rid of the gas tank and replace it with batteries. You get rid of the internal combustion engine and all of that's[?] associated systems. And you get rid of the transmission system and the gear box. Or most of the transmission system. So, you probably have between 5 and 10 times fewer moving parts. And, that obviously has an awful lot of consequences inside the car industry, which are kind of the first-order effects. It has fairly obvious effects on kind of the supply chain; and also on things like companies making machine tools--which is a big part of German industry. But then the [?]--

Russ Roberts: Companies--I'm sorry. Companies making what?

Benedict Evans: Machine tools.

Russ Roberts: Oh, machine tools. Sure, the work on the cars. Yeah.

Benedict Evans: Yeah, like the people who make old stuff--the machine tools that make all those moving parts inside the gear box have a problem. But then you sort of start [?] thinking, 'Well, what about things like gas stations?' So, there's 150,000-odd gas stations in the USA. Gas is sold at almost no margin. They make their money from everything else. [?] they would base it, you mean [?] salt, sugar, and nicotine, in kind of shiny plastic packaging. And some portion of that is an impulse purchase. And, if you are never going to a gas station again--basically you'll only go there if you want the salt, sugar, or nicotine--you won't [?] go to get gas any more. So what happens to sales of those? Something over half of sales tobacco in the United States, say, are sold in gas stations. Some portion of that is an impulse purchase--as [?] sort of suggests studies of who and what pricing changes and what availability in packaging changes due to tobacco consumption. So, um, I thought that was kind of an interesting consequence. There's another, um, perhaps [?] more directly related to cars, around repair. So, as far as I can make out, something around half of repair maintenance expenditure in the USA on the stuff[?] that's already related to the internal combustion engine--like the oil change and the transmission and everything else--the rest is like, you need tires or body work or the age-fact[?] rates, or something, so there's other stuff that won't be in sync[?]. But, again, you go--you have many fewer moving parts; you will have many fewer failures. You won't need an oil change because there's no oil. The radiator fan belt won't fail because there's no radiator. So, you get a radical simplification in the mechanics of the car; and that's what a lot the maintenance expenditure you go through [?]. And of course that is actually the economic support for a lot of the dealer network as well. Um, that's where they make their money. So, you've got these sort of rippling-out effects around the stuff that's sort of the support infrastructure around the gasoline car. Which will go away. You know, the adoption of electric cars is really a question of when rather than if. It's a function of battery pricing. And, battery pricing is kind of function of scale. So there's a circularity there, or virtuous circle. We are now at the point that we have expensive, un-economic electric cars. We will get to the point in the next 5 or 10 years that electric cars become cost-competitive with gasoline. And then it's[?] just the question of time, [?] or basically cycles out.

Russ Roberts: How confident are you that it's a 5-10 year process?

Benedict Evans: Well, so there's two processes here. So, there's: How long does it take to get to the point that, um, an ordinary, boring car is cheaper to buy as an electric car--it's cheaper to buy an ordinary, boring electric car than to buy an ordinary, boring gasoline car. So, that's how long--and that's a question of battery pricing, really: How long does it--and scale? Then: how long would it take before all new cars on the market are electric? How long does it take before all new cars on the market are electric? How long does it take before all the old cars cycle out of the system? And that kind of depends on public policy, because it depends on what kind of incentives you put into government [?] to do that. But, that feels like, you know, a 20-, 30-, 40- year process, depending on how aggressive you are, while going, you know, from the $50,000 electric car to the $10,000 or the $20,000 electric car; and how what you think the lifespan of existing vehicles is, and so on. So, it's not something--it's not likely when it will be done in 5-10 years. It's more likely it will get started in 5-10 years.

6:02

Russ Roberts: I guess--is there any issue--there are some things that are simpler about an electric car. Which means that there won't be the repairs that are necessary for an internal combustion engine. Are there some things that are more complicated in an electric car?

Benedict Evans: Well, there's more software. So--and then--and then by extension, there's more computing. But, that's kind of solid state. It's not moving parts. So, you know, there's a different cost structure to a--to a [?] car. So, if you look at--an UBS[?] today, a tear-down of a Chevy Volt, it's a kind of a normal gasoline car--and, you know, the propulsion part is a lot cheaper. The electric motor and the battery cost less than having an internal combustion, a complete internal combustion engine plus the cost of gasoline. But then you've got the--the electronics in there add a significant amount of costs. But that's kind of a transitional issue. You know, that will shrink down over time.

7:01

Russ Roberts: Your point about the margins of dealerships: I have heard that before, that they don't make much money on the cars. And they make increasingly less as information becomes more widely available and people shop more wisely. The Internet has, I think, really brought those margins down dramatically. And, so, the claim is, then, that they make their money on the repairs. Of course, if the repairs go away, it's possible that the price of cars will be higher: that those margins will have to adjust to make that worthwhile--if there are still places that people show up to buy cars at.

Benedict Evans: Yeah. I mean, it depends what the purchasing model looks like, doesn't it? I mean, I[?] will see Tesla is trying to go direct[?]. It's not clear that everyone will be able to go direct.

Russ Roberts: Right.

Benedict Evans: Now, of course, there's now there's another effect, which [?] what comes on to autonomy--which is if there are fewer accidents, there will be much less repair work, as well.

Russ Roberts: For sure.

Benedict Evans: So, and that doesn't need full autonomy. We can maybe go on to talk about, you know, different kinds of autonomy. But, you know, the holy grail is the car that doesn't have a steering wheel, or the truck that doesn't have a human cabin. But, you don't need to get that far before you start reducing that accident rate really significantly; and also, you don't have to have very many vehicles that never crash into anything before the accident rates are going down.

Russ Roberts: Yeah. We will get to that. I want to stick, for the moment, to electric cars. What do you see--and you speculate a little bit in the piece on this--what do you see as the model for how people are going to be charging the cars? Obviously, one of challenges, at least right now, is the charging phase that place over time. So, you are not going to show up at a gas station with an impulse purchase opportunity to gas up, to charge up your car. You are going to have to plug it in somewhere for a relatively longer period of time. Is that going to change, do you think? And, how might people charge their cars in a world where electric cars are more common?

Benedict Evans: There's no question there's a problem here, or a challenge, depending on whether, how you want to talk about it. And yes, you don't charge quickly. And we're not on a--there's not a kind of an imminent timeline to be able to kind of fully charge your vehicle in 5 minutes the way you do with, you know, with gasoline. So, there's a bunch of options. One is that you charge at work: You have charging stations in car parks; you have charging stations in supermarkets. How far you scale that is a challenge. This is actually, I think, this [?] becomes an urban density question, because if you live in--if you have somewhere where you have your own driveway or you have your own garage, then there's just--well, you've just got to pay somebody a couple of hundred dollars to put a charging point in your home. Where I used to live in London, I didn't own a car. If I had a car, I don't think I would ever have parked it in front of my front door. It would have been somewhere within 5 minutes' walk if I could find the space. And even if it was parked in front of my front door, it would be parked on the street, across the sidewalk. You know, 500 yards from a pub. Where, in my view, people come walking past. And I kind of, might kind of might collect drunks on the sidewalk, if I had a power cable strung out of my front door into my car. So, you know, yes: Real, practical question around what charging looks like. Related, frankly, to the real, practical question, the random walk[?], fueling looked like 100 years ago.

10:19

Russ Roberts: Yeah. I guess--I guess what we want is the same thing I have on a trip, when I use--I worry about my iPhone not lasting an entire day. I carry a small battery that I can recharge it with in the middle of the day if I need to. It's hard to imagine that will happen for a car.

Benedict Evans: Well, we do actually have that in a traditional[?transitional;?foundational?] sense. A moment. So, you can have cause, have a gasoline range extender. So, like the BMW I3--it does, as it might be, 100 miles; but then you can get an option to have a gasoline pack that will give it another 75 or something--I forget what the number is. So, there are all sorts of kind of transitional solutions to this. But, I mean--I just, I have in my mind--the kind of image is of people kind of doing kind of long-distance endurance rallies in automobiles before the First World War. And the photographs of these cars, they've all got bundles of like 3 dozen tires strapped to the side of, each side of the vehicle. Because, tires were not very good then.

Russ Roberts: Right.

Benedict Evans: So, these things get solved. That's the thing to solve. But it will get solved.

Russ Roberts: So, it could be, like, the Kindle. Instead of going for 300 miles, it will go for 3000 . And I'll only need to charge it once every 3 or 4 months.

Benedict Evans: Well, I think that would be--I don't think we are any place in battery technology that would do that unless you are thinking about [?] nuclear. But, I mean, there is also a psychological issue here. So, you also have to ask, 'Well, yes, your car could drive maybe 200-300 miles between being fueled.' But, how often do you actually need to drive 300 miles? You know: What is your actual average--even your average weekly consumption? And, you know, back to my example: If I did, most of living in Kendishtown[?] with a car, I would never drive--I might drive 300 miles once a year.

Russ Roberts: Right.

Benedict Evans: So, what happened with phones is that you went to having to charge once a week to having to charge once a day. And as long as you can charge overnight, you're okay. If it's more than overnight, then that becomes a problem.

Russ Roberts: But it's also your point about where that charging station would be. If it was once a month, you wouldn't mind driving across town to a charging station. And it would charge it in 10 minutes.

Benedict Evans: Yeah. I don't think we have anything in sight that would get us charging once a month. I'm more kind of thinking at the other end--that we [?] went from charging once week and to charging once a day, that actually that's turned out to be okay most of the time. And the same thing for cars. If it can't go for 300 miles, it can only go for 100 miles without being recharged, so actually it would be refueled, well, maybe that's actually okay for most people. You know, your gasoline car can go for 3 or 400 miles on a full tank; but actually don't do that, or very rarely do that. So, maybe you'd be okay with a vehicle that actually only does 100 miles on a charge. Because, actually, you'd never go more than a hundred miles.

Russ Roberts: Yeah--I'm thinking, though, about your urban density problem, now. If I don't have a driveway, the once-a-day problem might be a barrier.

Benedict Evans: It is. You kind of backed my point. So, imagine a--[?] once a day. If you have a collar[car?] that can only go a hundred miles on a charge, but actually you only drive 50 miles a week, then charging it once a week is kind of okay.

Russ Roberts: It's true. Good point.

Benedict Evans: And particularly, that's going to correlate with people in a high-density area. Where, if you live out in the boonies, yes, you might drive 50 or 100 miles a day; but you are going to have a driveway.

Russ Roberts: Yep. I like the point.

Benedict Evans: There's a bunch of variables.

Russ Roberts: Yeah.

13:57

Russ Roberts: What's the Elon Musk vision of the battery in my house that you allude to in that piece? What do you think he has in mind?

Benedict Evans: So, well, so there's two answers to that. One is, Elon Musk wants to do anything he can to get battery volumes up, in order to get battery prices down. And so, anything, any way he can think of to get people to buy more batteries, is good. And, that applies both to going from a low volume car to a high volume car, to talking about trucks potentially; but also trying to sell you another battery. And frankly, the solar[?] thing applies to that as well: Why buy a battery? Well, if you want to buy--having solar panels gives you an incentive to buy a battery in the same way. So, that's a large part of the story of your solar company. Um, so that's just kind of a scaling point. I think there's kind of a slightly more interesting conversation longer term when you think about what charging infrastructure looks like. So, you know, we talked about charging these cars. You have to think about, 'Well, what does that do to, like, power-generation requirements[?]?' and also the local power distribution grid?

Russ Roberts: Yeah. That's my favorite example. Because, I like to point out, Prius is really a coal-powered car--in some dimension, in many parts of the United States. Except for the fact that if you charge it at night, you can use excess capacity and you are not really increasing the amount of coal powered electricity generation. But, as more and more people adopt cars that are electric, that won't work.

Benedict Evans: Yeah. Well, it depends where you are. So, if you are in France, it's a nuclear-powered car.

Russ Roberts: ah-ah[?]

Benedict Evans: They tell you there's a question around excess--what the loading of the power-generation system looks like and when you are charging it--so, if you are charging it overnight, for example. That also is kind of comes to the point of the battery, because the battery can draw the excess power and then give it to your car when you need it. And indeed the battery can also store solar if you've got solar on your roof. So, the battery is kind of an intermediary buffer for that. Um, I mean, there are also kind of [?] power company questions around, 'Well, what does it actually mean if park the car in our neighborhood, if suddenly half the houses in this neighborhood are suddenly charging an electric pickup every night? What does that mean to the [?] substations we have?' And, 'What does the actual total load look like in that street all of a sudden?' So, that's a kind of transitional point. There's a bunch of analysis that's been done on, you know, what loading would look like, when people would using it, what the impact would be. And it kind of depends when and where you think people charge, and what time. Of course, that's kind of the crucial point. But also, what is the power infrastructure even look like in that country; and that is that point about France. Well, it depends. And that's kind of the renewable thing as well. If you've got a whole bunch of [?] in your power system, well that's not necessarily much good if people are charging overnight unless people have batteries.

16:48

Russ Roberts: Let's go back to this question of relentlessness of this process and the likelihood that we are going to move toward this world away from the internal combustion engine. Right now, electric cars are subsidized by the government. I'm against that, but that's neither here nor there.

Benedict Evans: Well, so are gasoline cars.

Russ Roberts: Yeah, well they are also--well, in which dimension?

Benedict Evans: And cars?

Russ Roberts: In which dimension are gasoline cars subsidized?

Benedict Evans: Well, it depends where you are. But, I don't want to dig into that. I think that's kind of a short term question.

Russ Roberts: Well, I mean--there are certain things--I always think it is funny when people say we should have a carbon tax. It might be a good idea. But we have a carbon tax. You could argue it's too low. We tax gasoline quite a bit. And you point out--I thought, also, cleverly in your piece that one of the impacts of this is going to reduce revenue for highway-building and other sorts of things that people use with gasoline taxes. But, the point is, is that right now there's a pretty heavy subsidy to the purchase of an electric car. If that went away, do you think that the technology improvements in battery pricing that we might see going forward are going to be sufficient to make an electric car with an internal combustion car in the next 5-10 years?

Benedict Evans: No question. You can argue about the timing but the cost track of lithium batteries is pretty clear. Quite when it reaches quite what price in order to be cost competitive with gasoline is still kind of a matter of opinion; there's a spread of estimates. But clearly having a subsidy on top of the purchase price of a car helps that. But, the underlying trend is the same.

Russ Roberts: So, that's going to be very interesting. If that really happens, the geopolitical impact is going to be quite dramatic. Large parts of the world--we've been mostly focused on, I think most of us in this conversation, you and me, the two of us--I've been thinking about the United States and the drivers and gas stations in the United States. But, of course, the nations that supply the oil to the world would have a very different future in a world where the internal combustion engine was not relevant. And one would expect, then, to play economist--one would expect that their behavior would change dramatically if they thought this was imminent. So, maybe they would--it doesn't seem to be changing. The price of gasoline is lower right now than it's been in a while. But, you'd expect it to be maybe lower still, because, just to take the most obvious example, Saudi Arabia is sitting on enormous reserves of crude oil, still. And, if it turns out that the internal combustion engine is not going to be a viable product in the marketplace, the value of that is going to be lower.

Benedict Evans: Yeah. So, there's a bunch of things to think about here. The portion of global oil production that goes towards is something like 40%, I believe, from memory. Now, removing that demand over a period of anything between 20 and 40 years, maybe longer, and of course removing it where--maybe a different rate in different countries--so there's a relatively--it's not going to happen overnight. And there are other uses for that production as well. So, it's not like there's going to be a guillotine. Also, to really play economist, of course if you were to look at Venezuela you could argue, 'Well, what good is oil today?'

Russ Roberts: Yeah, you can mess it up. You can have something valuable and not use it wisely.

Benedict Evans: Or, well, I mean there's a whole host of these problems--the curse of having assets, of having natural resources. So, you can certainly make and argument that [?] maybe it might do more harm to people selling luxury apartments in New York City than it might do to many of the people in those countries themselves.

Russ Roberts: That's a great point.

Benedict Evans: That's an economic argument--the development argument, is not the[?] only argument. I think there's another--on that point [?] it's worth looking at the other side. You'd think they are not so much Saudi[?] but if you look for example at Nigeria, the relevant petrochemical for a lot of people in Nigeria isn't gasoline: it's kerosene. For lighting. And, so, there, there's a solar[?] story. And so, the growth of solar and emerging markets as cheap, healthy energy--because you are sitting in a hearth[?] burning animal dung or burning kerosene--and that's how your kids are doing their homework--well, now you can have a solar panel. With an early day light[?delight?]. And so that's a way in which chemicals affect people's lives, and again to be changed by in fact some of the same technologies. There's a lot to do with cars.

Russ Roberts: Yeah.

22:17

Russ Roberts: Let's move on to driverless cars. Which, I have to confess I'm somewhat endlessly fascinated by the possibility of it and the implications. One of the things I really liked about your article is that, I think most people have misunderstood the full scope of the implications of driverless cars. They get the idea that there are going to be fewer accidents; they get the idea that there might be fewer people working as taxi drivers, Uber drivers, or truck drivers. And then they have some idea about, maybe that people won't be buying as many cars. Which, I think is much more complicated. But you spin out quite a few more interesting implications than those simple ones. And some of those implications reminded me of some ideas that I think people misunderstand--which we'll get to--not just don't notice but I think get it wrong. But, I want to start, in talking about driverless cars, with the different levels of autonomy that you alluded to earlier and that you mention in the piece.

Benedict Evans: So, that's a good way to frame this. So, the industry currently talks about 5 levels of autonomy. So, Level 1 to Level 5, or L-1 to L-5. Level 1 is the mechanical cruise control that came in in the late 1950s and early 1960s: so you put a switch on a stick, and the car will go at 69 miles an hour right into the truck in front of you. So, it's just a purely mechanical thing. Level 2 is that you add a little bit of radar to that, and maybe, or a [?] sensor to that. And so you will slow down if the vehicle in front slows down, and you will maybe get a warning if you start straying out of your lane. Purely based on looking at [?] what drives on the road. This is also based on the mechanistic as being done in software. But there's no intelligence to it. This is what you get if you buy a high-end German car or if you buy a Tesla. And, of course, Tesla, until very recently was buying exactly the same technology off the shelf, and an Israeli company called Mobileye that BMW (Bayerische Motoren Werke) and Mercedes were buying. And a Tesla which is calling[?] autopilot, which is the same thing. Um, and yeah--that will drive straight into the back of the truck in front of you slightly less often, but it's slightly less intelligent. That's Level 2. Level 3, it actually has some sense of its surroundings. It can look around itself. It has some 360 awareness although of a basic kind. You can give it a direction and it will take you there. But, you need to be sitting in the driver's seat with your hands about an inch away from the steering wheel at all times, because at any point it might get something wrong, or it might just stop and said, 'What to do now?' That will fall--you can read a book. It might stop and don't know what to do. But it almost certainly won't. Level 5 is just a question of Level 4 but with more lines of liability. So, Level 5 is the point where you are confident that you can take the steering wheel out of the vehicle, and that you can potentially drive--for example, you can design a commercial vehicle without a human cabinet at all. Now, I think the interesting thing, as you move along that progression, is that a Level 2, Level 3, is basically a safer car but it's still a car. Level 4, Level 5, you use the term 'self-driving cars.' I prefer the term 'autonomous.' And the reason I don't like the term 'self-driving car' is that's very like saying 'horseless carriage.' That, you remove the horse from the carriage--and if you look at early automobiles, early vehicles from the early 20th century, they've taken the horse off, but it's still a carriage.

Russ Roberts: Yup.

Benedict Evans: And in the same way, you remove the person, but it's still a car. Well, that's not how it works. And, you know, removing the gas tank just as electric isn't about removing the gas tank, autonomy isn't about actually about the car driving itself. It's about the you getting rid of the person. And it's about changing everything else about that vehicle. And everything about the city around it. In much the same way that removing the horse wasn't just about removing the--it changed everything else about vehicles and everything else about it[?]

Benedict Evans: Um, so, opinion varies on this. The most optimistic people will say we'll have sort-of Level4/Level5 in 5 years. The consensus probably edges more towards 10 years. The very ability within--and that's for the first vehicle. Then, just as for electric, then you have a whole transition question of: Well, how long does it take for the first one to all vehicles being sold, new vehicles? And then, how long does it take till all vehicles in an area, or in a city? And, do you have, like, segregated lanes, or park-and-ride? And what incentives do you have? And so on. But, 5-10 years for the first one. The very ability in that is really about, like, the last couple of percent of difficulty. So, if you had a city where there, if you have a like a, if you have a place where there are no pedestrians and no human drivers, an automatic car is really easy. The hard part is accounting for what other people are going to do, accounting for pedestrians, accounting for the child that might run out from behind the parked car.

Russ Roberts: Yeah.

Benedict Evans: And so, like, we may well have like Level 4 on highways like soon. Having Level 5 in Naples [Italy] might be a bit more difficult.

Russ Roberts: Right.

Benedict Evans: Like, what exactly is that hand-gesture telling you to go do? So, there may be that, you know, there are situations and use-cases where it takes a lot longer for this really to work properly.

28:19

Russ Roberts: Is it--do you think it's feasible? And one of the glorious prospects for this is, um, zero accidents. Obviously, most, many accidents are caused by human failure right now. There's going to be--

Benedict Evans: It's over 90%.

Russ Roberts: And, of course, an autonomous car is going to make a mistake now and then. It already has. And tragically it's killed some people.

Benedict Evans: Well, that was an autonomous car.

Russ Roberts: Oh, that was a--

Benedict Evans: That was a Tesla.

Russ Roberts: That was a 2.

Benedict Evans: Yes. That was a Level 2.

Russ Roberts: So, when we go to 4 or 5, is the only accident going to be the deer darting in the road that you mention in the piece? Or, will there be the potential for--in other words, here's the thing. When autonomous cars first got proposed--and I see them driving around my neighborhood: I'm in Palo Alto for the summer, so I literally see them in front of my house, cruising around--you know, it's kind of amazing. It's like a dog on his hind legs. Amazing--it's not at all. Is it really feasible that it will be accident-free?

Benedict Evans: Well, it depends on what you mean by 'accident-free.' Um, yes, there will be the deer that runs out, and there will be the tree that falls down. There will be the acts of God, so to speak, where it is not an error. Will there be errors? Realistically, perhaps. Will they kill people or will they be something else, where the car just kind of sucks? You know, the error I can expect to see more of is like 2 cars at a junction and each of them keeps waiting for the other one to go, and neither of them go and they stay there all day.

Benedict Evans: Yeah. So, I think that feels more probable to me than the vehicle that just kills, that's just killing people. Although you can't really talk in absolutes here. On the other hand, 35,000 Americans were killed in road accidents last year; and we just kind of shrug that off as part of life. So, there's also a kind of degree of psychological acceptance and understanding I think. And the number of people--you know, how many people are killed by tobacco in the United States every year? And yet we don't ban tobacco. Car accidents killed 35,000 people in the USA last year. Tobacco killed half a million. Tobacco is legal. So, there's a real question of psychology and consumer consciousness and consumer--how people think about this stuff, [?] that. But, yeah: I don't think--there's no, like--let's put it another way. There's certainly no theoretical barrier to getting to Level 4. Which is the accident-free place. The questions around the Level 5--which is the--okay, now you can have a vehicle that doesn't have a human driver. And that's a part that all the economics change, and the cities change.

31:18

Russ Roberts: Yeah. And it's more fun to talk about. So, we're going to talk about Level 5. But before we do, one more question: What's the hacking risk here? If we move to a Level 5--I'll make the segue here. If we move to the Level 5, where the cars are coordinated in a way--so we could think about cars going 100, 120 miles an hour or faster, in a chain, 2 feet apart because there's no risk of coordination among them that cause traffic or death. What's going to be the potential--and I don't know how smart the grid is going to have to be, versus the car itself. Because, there's certainly going to be some gains from going from it--cars being smart to streets being smart. And if we go to that level, what's the hacking potential?

Benedict Evans: Well, so, first of all, I don't think there is a consensus that you would have a smart street, so to speak, as opposed to small cars. There are kind of two levels to this. So, one level is, in an on-demand world, you would absolutely have coordination of placement of vehicles around cities: so as to optimize the efficiency of traffic. So, there was always a vehicle, there was just the right number of vehicles to pick everybody up, and no more in any given area. And, you know, optimized routing of those vehicles. And you may well have optimized routing, optimization of the routes the vehicles take around the city. So, it's to kind of make sure you don't have one city where every vehicle decides--where every vehicle decides to go down the same road. So, at the moment, you drive around using vehicle maps. You can clearly see--you know, this 5-element[?]--you are going down this kind of random suburban side-street and you can see the [?sci-fi?] level cars who are following the same Google routes. So, you expect to see coordination of that. You expect to see coordination of cars within the city.

Russ Roberts: Yep.

Benedict Evans: Whether you would have coordination of vehicles on a one-to-one basis talking to each other to make sure they don't hit each other--I think that's a whole lot of question. I think a lot of people would say, actually, 'No, you won't.' Because, you know--they may--it would be much more like the relation of you driving yourself versus Google Map. So, the car might be being told what votes go down. But it may be entirely autonomous as to how it goes down those roads and how it stops and accelerates. Opinions vary on that. So, some people think you would have everything kind of managed, done, centrally. But I think most people think it would be a car itself that would be making that decision. Now, clearly there's a threat of the car itself, because itself being hacked. You know, they are [?] network-connected computers designed by human beings. And, you know, every time you make something idiot-proof, God creates a better idiot. So, if you've got one, you can't guarantee that. But, at the same sense, I don't think one can just say we won't do anything, just in case something goes wrong.

Russ Roberts: Yup. I agree. I just wonder--you know, I think the--there is a temptation, I think among technology people, to just sort of wave their hands and say, 'Well, this problem will get solved.' Because it's always been solved; and we're just smart and we'll think about it, and we'll work it out and we'll fix it. And then there's the similar, anti-technology people who say, 'Well, then, a bunch of evil people are going to mastermind all the course crashing into each other at once.' And, neither of those is quite capturing what actually goes on in human innovation. I'm just curious about how worrisome you think that latter problem is. I know it's not the movie version, where an evil genius whispers the wrong word, and all the curs[?] hear it through their censors; and it ruins their computer systems, and they all drive off cliffs. But is there some in-between scenario that is a little bit frightening to you?

Benedict Evans: Um, so, there's a whole lot of conversation around how, like how the sort of computer security is threatened by [?]--that it's no longer, you know, a teenager walks into your building with a [?] on a floppy disk, or, you know, somebody hacks in from outside. It's now 300 people in a building in China who know what school your kid goes to and send you or your executive assistant an email that looks like he comes from the head of--it looks like an invoice from the school or something. So, there's a--you know, that's a kind of other question. So, yes, it's a concern. It's kind of like, it's a problem to solve once we've worked out if we can ever make this work at all, though, I think.

Russ Roberts: Could you say that again?

Benedict Evans: Well, it's a problem that we'll have to solve once we've made a car that can drive itself. If you can't make a car that can drive itself, anyway--

Russ Roberts: it's moot--

Benedict Evans: we'll put the [?] on afterwards.

35:56

Russ Roberts: So, one of the things that people forget about, is your point about the horseless carriage. There's going to be a very different design of the physical car. It's not just going to not going to have a front seat. So, talk about some of the changes. Or everything will be the front seat. But there will be no place for a "driver." It might look like, I don't know, a circular lounge, or a table with 10 seats around it. Who knows what it will look like? It'll look more like a teacup at Disneyworld floating around. What are some of the changes? You point out an interesting and not-so-obvious fact that cars are heavy--for safety reasons. So, what else might change?

Benedict Evans: So, there's a bunch of kind of basic assumptions that change. The first one is that the vehicle is going to be in collisions. And, obviously, again, there's a transitional period where you still have human-driven cars around; and then there's a period where everything is totally automatic and even more stuff changes. But, in a fully automatic world there are no collisions; therefore there are no safety cages, no crumple zones, no airbags. Or maybe much reduced; or you design those with completely different thinking in mind. And so that obviously changes the weight, and the cost. It can also change the physical design that the vehicle might look like--I mean, the design that we have now where to kind of have a sloped front and a slope to the back and trunk and so on--the durables[?] can be in different places. You know, the windows can be in different places. Also, you don't have a loads of[?] mechanical lump[?] of an internal combustion engine there, which you can get rid of. That's part of the point the point of looking at a Tesla is you wouldn't actually know if it didn't have a gasoline engine inside it if you didn't know in advance. You can design, and with both electric and a 0-accident world, you can design vehicles that look quite differently. Secondly, think about, if you think about on-demand as well, is that you could design vehicles that would only go at 20 or 30 miles per hour. So, today, vehicle you design has to be able to go on the freeway because you might need to go on the freeway. But, in an on-demand world, the system would know where you were going. And, if you weren't going on a freeway, it wouldn't necessarily have to send a vehicle that was going to do that. So, you really could have, you know, "pods" that aren't particularly streamlined because they are not going to get over 25 miles an hour.

Russ Roberts: So, you are talking now--when you say, 'on demand,' you mean, like, an Uber-type service without a driver.

Benedict Evans: Yes.

Russ Roberts: So, you are thinking about--let's think about what this would be. So, I'm going to go to the grocery. The grocery is about 3 miles away, so I don't want to walk.

Russ Roberts: Good point. I forgot about that. I'm just in a wistful--

Benedict Evans: [?] but that makes another point: which is, how does this change thinking about delivery? Particularly, again, if you are in the suburbs, you could very easily imagine a vehicle that kind of came and dropped off a canister at your front door, when you were there, that didn't even necessarily have a human being in the vehicle.

Russ Roberts: Correct. Yeah. It would pull up and it would be like an Amazon Locker: I just go in--

Benedict Evans: Yeah, exactly.

Russ Roberts: and take it out. Or--I want to be there, though. That's a huge problem. It needs to eject it onto my front lawn, or it would probably need to stick its arm into a box that I had on my front lawn.

Benedict Evans: Yeah. There's a bunch of other stuff that would need to change before you could go to, like, before you could do all of that, those kind of things. But you know, test the assumption that you are going to take yourself to the grocery store, because of course that, the driving is a cost of delivery in the other direction.

Russ Roberts: So, let's take--

Benedict Evans: I mean, I was going to say, the embedded point within this, of course, because it isn't clear, is that if you remove the human driver from a vehicle, you take out at least 3/4 of the cost.

Russ Roberts: Yeah. That's huge.

Benedict Evans: So, an on-demand ride that costs $10 bucks today would cost $2 or $3 bucks. And if you remove the insurance--if you are in a fully autonomous world with no accidents--then the insurance goes down as well. So it goes from $10 to $2. And so your calculation about whether you own a vehicle, or whether you own one vehicle or two, is going to change a great deal. And your calculation about where you might come in--going to the grocery store-- [?] to me that's like [?] to me that's like a less-interesting example. The example I really like is: You are going to go out, you are thinking about going out to dinner, in central, in Manhattan or central London, on a night in November. And it's cold and dark and raining. And you live in the suburbs. So, you can walk 10 minutes to the train station, and then get a train for 20 minutes, and get the subway, and you'll arrive at this restaurant an hour later. You could call for an existing car, like a taxi--and that will cost you $20 each way. You could drive yourself; and then you are going to spend 25 minutes looking for parking and pay for parking; and of course, one of you can't drink because you've got to drive back. And then you've got to walk back to where you parked the car. Well, now, an on-demand ride will get you there and back for $3 each way. Or, $4 each way. So, the whole way that you think about a city changes.

41:09

Russ Roberts: We got started on this because you were talking, making an observation, which was very interesting, that's not in your piece, about the fact that a car's design would be different if it never had to go above 30 miles an hour. And in that case, though, I'd probably want to go a little faster.

Benedict Evans: Yeah. In this case, you might be going fast. Yes. Or, the car might have a bar in it. Of course, there will be no such thing as drunk driving.

Russ Roberts: Right. No, it would have a bar, or a vending machine, or a--who knows what--a TV.

Benedict Evans: It will have a mini-bar, and that will be the expensive part of your trip.

Russ Roberts: Yeah. You know, I'm thinking more of a surround screen of, say, the whole front half of the car, which would wrap around you so that you could be immersed in YouTube for the 20-minute ride rather than talking to anybody or thinking independent thought. It's a little bit of a frightening world. But, I think it's coming. Right now, we drive, and our mind wanders. Which is an amazing thing. You can drive pretty well when your mind's not looking at the street, really. Your brain is doing about a thousand other things. Now you are going to be able to decide what your brain does in those times. You are not going to be just on your cellphone. Because, I assume driverless, autonomous cars--without drivers, autonomous, on-demand cars--are going to have entertainment options. I assume there will be some competition; and some that will have a person.

Benedict Evans: So, I actually disagree with that.

Russ Roberts: Okay. Fire away.

Benedict Evans: So, certainly, I've seen, like, people in the phone[?] industry sort of presuming that they are going to be able to sell Netflix subscriptions. My presumption is that it's your phone. And maybe the screen in the card connects to your phone. And so, your phone sends video to the car[?]. So, it's AirPlay. It's AirPlay or Chrome, or music. So the car will have a screen and speakers, yes. But I don't think that that will be stand-alone. I think that will be part of your broader account. Like, maybe you'll log in to the phone. Maybe it will be this Apple Car--you know, you'll log in to it, and it will have the same stuff that you have a new iPhone, or maybe it's just a dumb luck. You know, what's going to happen with TV, is TV is going to be a dumb screen; and that speakers will be on speakers and they'll just accept stuff on the phone. I think that's probably more the model.

43:17

Russ Roberts: So, in this world--let me try a different version. I know you've written some interesting things about virtual reality and augmented reality. So, suppose, instead of a car, I'm on, like, a Segway, maybe? Some kind of--little, tiny--instead of being like a limo, I'm in like a platform, just a rolling platform that goes at various speeds. And, I'm using my augmented virtual reality phone/headset/embeddedship to entertain myself. The car itself isn't going to have much of anything.

Benedict Evans: Yeah. Absolutely. And of course that would also be the case if it were a shared vehicle. And so this is, again, this is another tangent, another interesting case to spiral off in. Right now, you've got a kind of binary distinction. Set trains aside as a separate conversation. But you have a bus, and then you have a car, which is highly your own; or you have a taxi. And, as opposed to a bus--which is this big, heavy thing that carries 50 people. And, um, a 4-seat vehicle that is completely automatically controlled--so, [?] back--so, I'm living, I'm sort of speaking to you from Silicon Valley, you are in [?] Palo Alto as well. There's whole parts of the world where by density of people it means there are a lot of cars around, but the density also means that you can't support a bus network that runs on a fixed route and a fixed schedule, stopping at fixed points with a vehicle that's a certain size and that has a human driver. Now, one of the things that autonomy does is it sort of breaks down that binary distinction. So, if I step out on the street and I press the Palo Alto Public Transit App button on my phone and say, 'I need a ride,' and a pod that's two blocks away and has two people in it already, and I get in, and I take a third seat; and then it goes off and drops someone else [?] and then drops me where I want to go and picks up somebody else on the way: Well, is that a bus or a cab? I don't think that's a meaningful question. It's something else. But is it public transit? Is it a cab? Well, it's changing what that conversation[?] looks like. You are kind of unbundling the paths[?], but you are also in a sense re-aggregating taxis. And so you are changing how you might think about how you might move around a neighborhood like that.

Russ Roberts: Yeah--

Benedict Evans: Because you can--you can [?] reach it dynamically. Because you don't have the cost of a driver.

Russ Roberts: Do you think there will be drivers? Not drivers, but co-passengers for socializing? Do you think someone will want to ride with someone who is not driving, just wants to chat 'em up?

Benedict Evans: Depends, you know, depends what part of the country you are in, whether that's going to work or not, I think

46:17

Russ Roberts: So, you mentioned that there's not going to be any drunk driving. There might be a bar in the car. You certainly don't have to have a designated driver. Have we seen, right now, in places where Uber is fairly friendly and doing well: Do we notice that there is more drinking going on? I feel like there is. But there should be more drinking. Is Uber big enough--and Lyft--ubiquitous enough, that we can observe fewer accidents and more drinking?

Benedict Evans: So, short answer, Yes. I don't have it immediately to mind, but there's definitely been studies showing declines in drink-driving. I think--and actually, I think the reverse in Austin when they shot down Uber and Lyft.

Russ Roberts: Well, I know there's going to be more drunk--there's going to be less drunk driving; I wonder if there's going to be more drinking overall? In other words, you and I are going to go out, and one of us is going to have to not drink--so maybe not have so much fun, maybe. Is it now the case that, since we can both drink, that we go more often?

Benedict Evans: Um, I think that's one of those like [?] consequences it's really hard to predict. I mean, certainly something that I experienced--you know, I was at university just before mobile phones happened. And they kind of happened as I was in my late, as I was in my kind of, as I was in my early 20s in London. And there was a fundamental change--suddenly people started making [?], because before mobile phones if you were going to meet you had to agree at like lunchtime where you were going to meet. And they were all going to meet here at this time. And if you didn't get there, then that was it: You didn't see your friends that night. And then mobile phones happened; and suddenly people don't make plans; and stuff just kind of spontaneously organizes, as you drift through, you know, 10 blocks of the city. So, I don't think anyone was sitting in 1995 and saying, 'Gee, mobile phones will mean that people will go to different, will go to 5 bars instead of 1 bar,' which is kind of what happened. I don't think you can predict those kinds of changes.

Russ Roberts: Yeah, it's fascinating, really. I didn't think about that planning thing. Although I still think--it's interesting how social norms have to evolve at the same time. We live in a world where everybody has their phone with them now. And most of us don't make phone calls. It's a remarkable thing how little you use your phone to call somebody. You use it to text; you use it to email; you use it to whatever else--whatever social media you use to interact with people, especially younger people. But I find it fascinating that this device we call a 'phone' is so rarely used for calling.

Benedict Evans: Well, how often do you dial it?

Russ Roberts: I don't think I do it more than--

Benedict Evans: You haven't actually used a telephone dial in probably 20 years.

Russ Roberts: Oh, for sure, but I was thinking you--

Benedict Evans: And you haven't hung up a phone in probably 40 years.

Russ Roberts: For sure--

Benedict Evans: These terms linger on long after we've forgotten what they actually mean.

Russ Roberts: But the only phone calls that I make on my cellphone--90% of them or maybe higher are people who live out of town: my parents, my siblings, my friends back in Washington, D.C. when I'm away for the summer, I might call them. But, for the people I'm living around, I don't call them very often. Mainly text, and say, 'See you soon,' or 'Can you meet me here?'

Benedict Evans: I wrote another blog post looking at sort of the ways that we make, like, the wrong predictions about the future. And one of the things that I put in this was a report from a firm called [?], which is a telecom consulting firm in 1990. And I'll just read you the opening paragraph. This is 1990, so we are just starting to get, like ISDN [Integrated Services Digital Network], like digital connections. Very few people have a PC [personal computer].

The telephone is going through a metamorphosis, that black Bakelite crystal is becoming an electronic butterfly, but what kind of butterfly? Could it be that the Fax has given us a glimpse of what lies ahead? [?] the world there may be a world where millions of people [?] workstation displays and electronic documents through cross-border telecom circuits.

Circuits. And so this then-report then goes on to talk about how the government treaties that regulate how phone companies pay [?] for cross-border traffic will have to be reworked, because will be making many, many, many more international circuits through phone calls to exchange information with each other. Maybe color faxes; or faxes that don't print out--that just have screens. But you'll still be like[?] actually dialing an actual telephone number to somebody in Japan to see what's in their computer. And so, you can--this is all kind of the problem about predictions about the future: you make linear predictions. So, you look at the thing that's going to happen now and you extrapolate it into the future without realizing that the character of it is going to change into something else.

51:20

Russ Roberts: So, let's talk about a few more examples of that, in the driver/autonomous car world, because they are some of the more exciting ones. One of the things --there are two things that I think about. And one of them I didn't think about correctly; and your piece reminded me to get it right. Which is, if you don't buy a car, as a consumer, and you rely on on-demand autonomous cars, then you don't need a garage. Which is good, because in Palo Alto nobody puts a car in a garage. They use it as storage. But, you don't need a garage for storing your car. You don't need a driveway. Roads don't have to be as wide, because you don't have to worry as much about human error--going outside the lane. And so, cities could be very different. And in particular, one thing you focused on is parking. Parking becomes a very different thing. But one thing you didn't mention much--I mean, you alluded to it earlier in our conversation--is where the driverless cars, the autonomous cars, are going to be hanging out while I'm eating dinner, wandering to go see a friend or whatever it is. And I think in most people's minds, they are just wandering around, like Uber drivers do now. But, they probably--

Benedict Evans: They'll be plotting.

Russ Roberts: Yeah. They wouldn't be wandering around. That would be not the right thing that's probably going to happen. The other thing that I just want to mention, because I think I've gotten this wrong before--and this is the one thing I've thought about I think that's right now--is, a lot of people I think misunderstand thing that, right now, your car is sitting in your driveway doing nothing. And with autonomous, on-demand cars, it's going to be in use all the time. But that just means it's going to wear out sooner. It's really your driveway that's wasted, not the car when it's sitting there. When the car is sitting there, it's in the elements. It can get rained on. It can rust a little bit, and other things. It's not always good for it to not be used for a while. But the real effectiveness of this issue is going to be on the roads and the driveways, not so much the cars. They are going to need more maintenance. Even if they are electric, they are going to need more--their tires are going to wear out sooner if they are used 24/7 or close to 24/7. And, where are they going to hang out? That's the other thing I'm thinking about.

Benedict Evans: So, I think there's--well, there's--so, there's a bunch of things to think about here. One of them is, like, certainly, even if it's your own vehicle that isn't on-demand, it doesn't need to wait[?] distance. So, particularly in city centers, you can re-think most obviously on-street parking. And so if you look at like any New York, or any kind of European city, the center of the city, you've got cars parked down most sides of the road, and that like halves the width of the road. So, you don't need on-street parking. Crime[?prime?] and sort of building parking space in new buildings, in high-value real-estate areas--again, you don't need to give up 6 floors of Park Avenue for parking. Something like 25% of the surface area of LA County [Los Angeles County] is parking. So, there's a real estate question here, first of all: that the parking can move. There is a issue[?] that a real [?] your car isn't parked but it goes away and then it comes back, so that's more traffic. But, on the other hand, you don't spend 25 minutes driving around and around looking for a parking space, so you have less traffic. And the roads are twice as wide because you don't have people parked on both sides of the road. So, you know, you get pros and cons here.

Russ Roberts: Yeah. Sidewalks are going to be a lot more interesting, because they are going to be a lot wider, potentially.

Benedict Evans: Yeah, they could be. Yes. Or there could actually be an extra lane, depending on where you are. There's a utilization question is kind of interesting, which is, like, it feels like, to me it feels a little bit crude to say, like, your car is used 93% of the time, because, you know, 8 hours of that is in the middle of the night when no one else is going to want the car, either, then.

Russ Roberts: For sure.

Benedict Evans: And, there's a whole bunch of other--like, how many people actually want to be driving around at 3 o'clock in the afternoon on the Thursday? So, I think it's a bit problematic to look at the total because, actually most cars are used--yes, they are in use 7% of the day, but it's all the same 7%. And actually unless people stop working or work completely different times, that's not going to change.

Russ Roberts: Yup.

Benedict Evans: So, I think it's a little bit tricky to talk about utilization rates overall. Then, of course, you see this now--Uber and Lyft, they actually have to get more drivers, because actually there are actually lots of unused cars driving around that are available. I think the--there's a kind of--the broader kind of parking question around, like--okay, you see your house has a parking space and a garage. Okay: you won't fill the house with a garage. In fact, no houses in the United Kingdom have been built with garages, because of course the weather doesn't require it. There is a period when you actually need to park your car indoors in the British weather; and now you don't. American weather, you still need to put your car indoors to get [?]. Um, but, where they go, it depends. The point is they don't have to go within walking distance of where you are now. So, you could optimize it in ways that you can't optimize it now. The answer might be, might just stay in place, sometimes. You know, Walmart, presuming there is still a Walmart, or Walmart out in the suburbs, if people are still going there themselves, well the car is just going to stop in the parking lot. That's probably the best place for it. But in central Manhattan, or, you know, the expensive part of LA or something, they might have a very different calculation. So, you know, it's complicated.

56:52

Russ Roberts: I guess the interesting question is: How many do you need? And I think you need quite a bit fewer--except for the fact that delivery and the fact that the price of an on-demand ride might be very low, as you suggested earlier. You might see people going out a lot more, because it's going to be so cheap.

Benedict Evans: You might. Again, you might go out a lot more, on demand, you might have one car instead of two. You might have a car for the weekends but on a weekday you might previously have driven to work, but now you go to work on a bus, but because a bus takes half as long because there's no congestion. Or, maybe, you previously, or maybe you are in, like I mentioned earlier, you are in a 4-person bus. Like, if you live in Palo Alto, previously you had to drive to work, because there was no other way to get to work. Well, now you might summon on-demand ride that might be carrying three other people. Maybe that's 4 cars that have become one car. So, there will be an awful lot of different variables in quite what this does to traffic, quite what it does to vehicle utilization, quite what it does to real estate.

Russ Roberts: I just want to say, we are recording this in 2017; and it of course is immortal. In 2027 and 2037 and 2047, people will of course be able to listen to old EconTalk episodes, maybe just by saying, 'Okay, Google: Benedict Evans, EconTalk 2017,' and then they are going to look back on this and say, 'What a genius he was!' Or, are they going to say, 'How clueless they were back in 2017! They didn't have any idea.'

Benedict Evans: It won't even be that, because it will be, 'Find me a podcast with somebody with a British accent in 2017 talking about autonomous cars and getting it wrong,' because by 2040, you'll be able to do that.

Russ Roberts: That's true.

Benedict Evans: Maybe not to that extent. But you'll certainly be able to say that, you know, this is a whole lot of conversation around machine learning. But, audio and video will be indexed in the way that text is indexed now, as a result of machine learning. And it's machine learning that is also enabling autonomous cars. So, you will be able to say, 'Show me a cool car chase on YouTube,' and it won't be because somebody typed in 'This is a cool car chase.' It will be because YouTube has indexed the video and it knows it's a car chase.

Russ Roberts: As a podcaster, I'm longing for that. It's, right now, one of the few frustrations about podcasting is the fact that they are hard to search. We have a semi-transcript--we call it the Highlights--that allows people to go back and find old points and old episodes. But I can't tell you how many times listeners have said to me, 'I can't find your interview with so-and-so.' And I always say, 'Well, that's because I've never interviewed him.'

Benedict Evans: To the point--just expanding a little bit on what I was just saying: of course, there won't be any car chases[?].

Russ Roberts: Oh. True.

Benedict Evans: Think about how many [?] from the past don't work now because of mobile phones. Well, there won't be any car chases. So, you couldn't make Heat again, for example.

Russ Roberts: Or The French Connection. The best--

Benedict Evans:The French Connection. All sorts of, you know--the world changes. There was a time when a movie plot point was a car breakdown. That--cars don't break down. There was a time when the movie plot was you couldn't reach somebody. Well, you can always reach people. So, movies will change.

Russ Roberts: For sure. The question is, there are people going to enjoy, just like we like looking at period dramas about, set around the Middle Ages, or British royalty, Henry the VIII--is it going to be a nostalgic thing to watch a movie with a car chase? Probably. I would think so.

Benedict Evans: Well, maybe it will be, well, yeah, there's a joke that every British actor needs to know how to ride a horse, and every American actor needs to look like he can shoot. So, maybe there will, in the future, be an actual need to look like, to pretend to look like know how to drive a car. No one will actually need to know, but there will be all these actors who will kind of be waving the steering wheel as though they know what they are doing.

Russ Roberts: Yeah. It's like smoking in a movie, right?

Benedict Evans: Exactly.

Russ Roberts: So often, a character takes out a cigarette. And I'm thinking, 'Why do that put that? Oh, it's supposed to show that he or she is cool, or has this savoir faire about them.' But, yeah, it will be the same thing. It used to be--of course, it used to be you drive a stick shift. And that would show that you were a person of the world. Now, maybe it will just be that you know how to start the car.

Benedict Evans: Well, yes. It's similar to that scene in Star Trek, maybe, where the engineer is shown a Mac and he talks to it; and they say, 'No, you have to use a mouse.' And he picks up a mouse and speaks into the mouse. So, it will be the same thing: People get into a car and stare at the steering wheel and just say, 'Hey, car, take me to work.' And the car doesn't do anything.

Russ Roberts: Yeah.

1:01:37

Russ Roberts: Well, we're almost out of time. I want to close with an observation that you close your piece with, which is another thing I hadn't thought about. And, we'll of course put a link up to the piece. It's really a thoughtful exploration of these issues. Which is the fact that, these driverless cars or autonomous cars are driving around with cameras. Twenty-four/seven. And so we're going to have a video footage of the world, the urban world for sure, available to law enforcement, to the government, to the NSA [National Security Agency], to--you name it. And we think about--I remember the tragedy of the Boston Marathon bombing--how much footage was available for people to paw through and pour over, that was publicly available. And a lot of really clever speculation was done. And it turned out to be totally wrong. I thought the wisdom of crowds was going to solve the problem because people had stitched together so many Flickr photographs and so many public-available ones. But the law-enforcement people had, of course, some access to other stuff that the public didn't. And it was very powerful; and I'm glad they caught the people; and they appear to have caught the right people. But, there's going to be some serious privacy issues with driverless cars because they are running video all the time.

Benedict Evans: Yeah. So, every autonomous car is capturing high-definition, 360-degrees, 3-D video all the time. Now, whether it keeps that, and where it puts it is a slightly different question. It's actually quite problematic to store all of that data from every car--like, there's actually a question of where you'd physically put it: Do we actually have enough storage to store all of it, from every car, would be, might be possibly [?] for a while. But, yes: You know, they, somebody's been killed and the cops say--they don't just pull the footage of all the cars in the neighborhood. They say, 'Did any car see anything strange?'

Russ Roberts: Yeah. 'Round up the usual suspects' will be 'Round up the cars,' first. To try--

Benedict Evans: Well, yeah, but it's not just 'Get me the raw video and I will watch it.' It's, 'Did any car see anything unusual?'

Russ Roberts: Right.

Benedict Evans: So, um, I mean, I sort of--you know, [?]. But, there was a murder in Britain sort of 15 years ago, where the police got the CCTV[?Closed-circuit television?] from the buses that were driving down a road nearby. And the bar[?] camera is just on the inside of the bus. But you just see out of one window, like, first bus, second bus, third bus--the second bus is a white van by the side of the road. And in the first and third bus, it's not there. So, they, you know you are looking for a white van. And that was kind of the break in the case. Well, you know, those buses will have 360-degree video, now. It won't be the white van. It will be the license plate and the model and the guy standing next to it.

Russ Roberts: Who will be identified immediately by--

Benedict Evans: Yeah. And: Were there any sex offenders in the area? Because you'll have that; you'll have all of that, all of the images of all the faces.

Russ Roberts: And I just want to, I just want to emphasize: the older you are, the weirder and creepier and alien a lot of this seems, of a world of surveillance, a world of cameras, a world of autonomous cars, a world where your does blah-blah-blah. Younger people are just going to find this normal. And, it will be the way that they are used to things. And culture, I assume, will evolve to accept most of this. You know, just the thrill of going shopping--we talked earlier: I happen to like going to the grocery store. I don't so often, but when I do go, I enjoy it. And, that fun's going to go away, I suspect, if delivery becomes cheap enough. And all these things are going to cause culture changes that we can't imagine.

Benedict Evans: Well, the changes that we can't imagine--the funny thing about this stuff is that we actually can't imagine the changes that have happened, because we don't have the perspective on what it was before.

Russ Roberts: Yeah.

Benedict Evans: So, to give an example: Like if you were a wanted man in a provincial town in Europe in, like 1890, the police--all the police had to do was put, like, one guy on each of the three roads[?routes?] out of town, and that was it. And they'd put a guy on the train station. And that was it. Like, you couldn't get on at the train station, so what are you going to do? You are stuck in the town. You can't go anywhere. And then cars come along and suddenly people can escape; and people can--you know, that degree of control just disappeared completely. There's a thing from the early 20th century called the Bonnot Gang in France, who were a gang of anarchist terrorists, who stole cars and stole rifles and went around killing people and shooting policemen. Police had no vehicles. Police had nothing--couldn't--struggled to work out what to do about this because they were stealing cars and could travel over 50 miles an hour. But the time that the police could catch someone by just checking the railway station is just kind of unimaginable now. But that was the way the world was.

Russ Roberts: And now they can check everything almost. And they will be able to--

Benedict Evans: Exactly. And again, we'll get other kinds of freedom and other kinds of restriction on freedom.

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paper TOWELS or PAPER towelstag:www.econtalk.org,2017://2.152562017-08-24T17:41:20Z2017-08-24T18:12:49Z Emergent order has long been a common EconTalk theme, and this week's fascinating episode is no exception. This week, host Russ Roberts welcomed Columbia University linguist John McWhorter to the program to discuss the evolution of language and his...Amy Willishttp://www.econlib.org Emergent order has long been a common EconTalk theme, and this week's fascinating episode is no exception. This week, host Russ Roberts welcomed Columbia University linguist John McWhorter to the program to discuss the evolution of language and his new book, Words on the Move. Language as an emergent order has also long been a theme of political economy, but McWhorter's engaging examples and explanations breathe new life into the subject. It's a must listen (and I mean listen, as you'll miss a tremendous amount of auditory nuance.) For example, is it paper TOWELS, or PAPER towels? BLACKboard or blackBOARD? Let us know your thoughts today!

1. Let's start with perhaps the most controversial question... Should we re-word Shakespeare for the modern audience? Why or why not?

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2. In thinking of language as an emergent order, what does it have in common with the emergent order of markets? How do they differ? What are the feedback loops in language evolution? Which do you find a better example of emergent order, and why?

3. Like, does it like drive you crazy when people are like constantly peppering their speech with "like?" Why should you like chill out about it, according to McWhorter?

4. How does the use of language differ in text versus conversational settings? How much do you employ what McWhorter refers to as "easing strategies" in conversation, and what does their use help you accomplish? (You may want to revisit the Shakespeare question as you think about this.)

5. Russ says several times during the conversation that McWhorter changed his mind about something. Did this week's conversation change your mind (or at least surprise you) about anything? What? If you could ask McWhorter one follow-up question about this week's episode, what would it be?